Spot yuan closed firmer on Tuesday as the dollar index dropped in intraday trade, but investors offshore and onshore anticipate the Chinese currency will weaken further in the next 12 months. Before trade began, the People's Bank of China (PBOC) set the yuan midpoint slightly weaker for the second consecutive day at 6.3411 to the dollar.
The central bank's move partly reflected a slight firming of the dollar index in overnight trade, which measures the greenback against a euro-dominated basket of currencies. But spot yuan rates showed no reaction in muted trade, moving a mere 5 pips from open to 6.3575 at midday. Spot yuan then began to move abruptly downward in mid-afternoon as the euro strengthened against the dollar in global markets, sliding 50 points to close at 6.3530 against the dollar, firmer than 6.3568 on Monday.
Traders expect spot yuan to move between 6.35 and 6.37 against the dollar in the near term. Offshore 1-year non-deliverable forwards NDFs have been suggesting yuan depreciation since March, although differing interest rates in Hong Kong and the mainland play a role in the gap. However, the spread between the NDF and the spot rate has continued to widen steadily. On Tuesday, NDFs changed hands at 6.4468, around 1.4 percent weaker than the spot price. Onshore 1-year yuan forwards took longer to change directions. Once a consistent predictor of yuan appreciation expectations in the onshore market, they swung toward predicting depreciation in July and are now trading close to the NDF price at 6.4837 per dollar.
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