China's yuan firms on stronger fixing, but gains seen capped

SHANGHAI: China's yuan firmed against the US dollar on Monday, buoyed by a stronger central bank guidance, but traders said further gains were likely to be restrained by corporate dollar demand this week.

Prior to market opening, the People's Bank of China set the yuan midpoint at 6.7410 per dollar, the highest since Oct. 20 2016, reflecting the dollar's broad weakness.

Monday's official guidance was 5 pips firmer than Friday's fix at 6.7415 per dollar.

The spot market opened at 6.7610 per dollar and was changing hands at 6.7618 at midday, 43 pips firmer than the previous late session close but 0.31 percent weaker than the midpoint.

Traders said the market was quite stable with the onshore spot yuan moving within a range of around 60 pips, while trading volume shrank to $7.764 billion as of midday. Full-day volume stood at $21.347 billion on Friday.

"The dollar remained weak in the global market. But corporate demand for the greenback was not so strong on Monday morning, as their buying has pushed up (USD/CNY) prices to fair value," said a trader at a foreign bank in Shanghai, adding dollar purchases may pick up again in the next few sessions as some companies may have dollar requirements near the month-end.

Multiple traders said the authorities may have slightly loosened their tight grip on the currency recently. They had not seen major state-owned banks selling dollars on Monday morning and big banks were also absent in the previous few sessions.

Another trader at a Chinese bank said the renminbi had shown some signs of appreciation and there was no need to draw additional help from the big banks.

State banks often start offering dollar liquidity in the onshore market when the onshore spot trades 100 pips weaker than the fixing. Traders said they have spotted such activity since late last year.

Companies have also inquired about liquidating their long dollar positions to protect against further exchange losses. Traders said these corporate dollar sales provide additional support for the yuan when their orders are executed.

The yuan gained around 0.1 percent against the dollar last week, but on a trade-weighted basis against a basket of currencies of its trading partners, it edged down 0.5 percent to 92.91 from 93.34 a week earlier, according to official data from the China Foreign Exchange Trade System (CFETS).

The CFETS publishes index figures on a weekly basis.

The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 93.63, weaker than the previous day's 93.72.

The global dollar index rose to 93.888 from the previous close of 93.858.

The offshore yuan was trading 0.06 percent firmer than the onshore spot at 6.7577 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 6.8945, 2.23 percent weaker than the midpoint.

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