SHANGHAI: China's yuan weakened in a volatile morning session on Wednesday, with the offshore yuan falling to a record-low as traders grappled with signs of accelerating capital outflows in the wake of Republican Donald Trump's US election win.
The People's Bank of China set the midpoint rate at 6.8904 per dollar prior to market open, weaker than the previous fix at 6.8779.
"The market was rather calm today. Big state banks were offering some dollar liquidity to offset dollar purchases by companies," said a Shanghai-basd trader at a Chinese bank.
The yuan has come into sharp focus in local and international markets as it slumped to 8-1/2-year lows amid a flight of capital from emerging economies as investors bet Trump's policies will spur US growth, inflation and interest rates higher.
Offshore, the yuan weakened past 6.92 per dollar level for the first time since it started trading overseas in late 2010. It stood at 6.9208 around midday after hitting a low of 6.9218.
In the mainland market, the spot opened at 6.8923 per dollar and was changing hands at 6.8926 at midday, 6 pips weaker than the previous late session close and 0.03 percent softer than the midpoint. It was still near levels of June, 2008.
The global dollar index rose to 101.05 from the previous close of 101.04.
Traders say state-owned banks - through which the PBOC intervenes in the FX market - appear to be taking a passive approach in propping up the yuan as opposed to previous times when they aggressively sold dollars to defend a specific yuan level.
OCBC Bank analysts said in a note that "the narrowing interest rate differentials between US and China indicate that downward pressure on the yuan remains intact."
Traders and analysts say capital outflows have become even more of a worry following the PBOC's new yuan fixing mechanism.
"(The yuan exchange rate mechanism) is a double-edged sword," said the trader. "A gradual depreciation in the currency to correct its high valuation might be a better option as a sharp fall may hurt the fragile economy," the trader said.
Before the changes adopted in August, the PBOC set the daily fix by asking currency market makers for price quotations. The new mechanism to fix the yuan midpoint is based on the closing price from a day earlier and by reference to a basket of currencies.
A central bank official said at a press briefing on Wednesday that it would crack down on capital flight, while on Tuesday an ex-PBOC official also raised worries about capital outflows.
Offshore one-year non-deliverable forwards contracts (NDFs), considered the best available proxy for forward-looking market expectations of the yuan's value, traded at 7.096, 2.90 percent weaker than the midpoint.
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