China's yuan firms after surprisingly strong midpoint

SHANGHAI: China's yuan firmed against the dollar on Monday after the central bank set a much stronger midpoint than the market had expected, traders said.

The People's Bank of China set the midpoint rate at 6.9312 per dollar prior to the market opening, compared with traders' expectations of around 6.95. Monday's official guidance rate was 196 pips, 0.28 percent firmer than the previous 6.9508.

"We don't know why the midpoint was set at that level, but it has dampened market sentiment," said a Shanghai-based trader at a foreign bank, adding that the deviation of more than 100 pips from market forecast has discouraged investors from testing lows in the yuan.

Some traders said the stronger midpoint was due to the yuan's midpoint mechanism, which eliminated some of the highest and lowest quotes from contributors.

Traders also noted that they had not seen major state-owned banks offering much dollar liquidity in morning trade on Monday.

The spot market opened at 6.9398 per dollar and was changing hands at 6.9445 at midday, 65 pips firmer than the previous late session close and 0.19 percent softer than the midpoint.

Separately, the latest China Foreign Exchange Trade System (CFETS) data showed that the index for the yuan's value based on the market's trade-weighted basket stood at 94.99 on Friday, up 0.33 percent from the previous week. However, the yuan lost 0.65 percent of its value to the dollar in the same period.

On Monday, government researchers in Beijing forecast more yuan depreciation ahead.

The yuan will depreciate against the dollar by another 3 percent to 5 percent in 2017, Ministry of Commerce researcher Jin Bosong said on Monday. The Chinese currency has fallen more than 6 percent against the dollar this year.

The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 95.88, weaker than the previous day's 96.02.

The global dollar index fell to 102.71 from the previous close of 102.95.

The offshore yuan was trading 0.02 percent firmer than the onshore spot at 6.9430 per dollar.

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 7.2569, 4.49 percent weaker than the midpoint.

One-year NDFs are settled against the midpoint, not the spot rate.