Yuan weakens against dollar, central bank wants stronger yuan

BEIJING/SHANGHAI: China's yuan weakened against the dollar in the morning session on Tuesday although the central bank showed a preference for a strong Chinese currency in its daily mid-point fixing.

The yuan traded against the dollar at 6.3901 against the central bank's mid-point of 6.3760, which was a shade lower than its record high fixing on Monday, but it gained a little from the previous close of 6.4006.

"The yuan's performance is similar to a Chinese stock's 'falling to the bottom limit'," an onshore foreign exchange trader with a city commercial bank said.

"Many market players are just selling yuan for dollar although the central bank is sending messages that 'we want a stronger yuan'," he added.

As global investors sought safe haven in the US dollar, Asian currencies were under heavy selling pressure, and the offshore Chinese yuan market had even, briefly, pointed to a weakened yuan against the dollar in the coming 12 months.

Offshore, one-year dollar/yuan non-deliverable forwards (NDFs) were bid at 6.3740 in morning trade on Tuesday, compared with the previous close of 6.3970.

"The offshore market has generated significant impact on the onshore yuan spot market," the trader said.

"However, in my view, the yuan is set to rise against the dollar in the longer-term despite current short-term fluctuations," he added.

Ju Wang and Kumar Rachapudi, analysts with Barclays Capital, said in a research note to clients that even the recent move in the NDF market was "over-done" and the Chinese currency had no fundamental reason to weaken against the greenback.

"On a political level, China is also likely to see a strong yuan as its contribution to stabilising the global economy, in particular to help Asian economies, and avoid the threat of competitive devaluations," they wrote.

"Our economists forecast USD/CNY will move to 6.08 in 12 months," they said.

China's yuan has risen 3.12 percent so far this year, in line with expectations that China's yuan would rise 3-5 percent against the dollar.