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SHANGHAI: China’s yuan slipped to a one-week low against a broadly stronger dollar on Wednesday, while seasonal demand for the greenback ahead of the Lunar New Year holidays continued to weigh on the Chinese currency.

Investor hopes for economic recovery in the wake of border reopening underpinned the yuan and Chinese assets. Currency traders said recent higher volatility, with the yuan touching a six-month high this week before giving up much of the gains, was partly driven by seasonal factors.

Chinese exporters converted their foreign exchange proceeds into the local unit for various payments and bonus handouts weeks before the holidays, while households’ demand for foreign currency for their upcoming overseas trips picked up this week, traders said. The week-long holidays will begin on Jan. 21 this year.

“We expect the yuan to touch 6.8 per dollar in the short term, but with the economic recovery continues, the yuan remains in the mid- to long-term appreciation trend,” said a trader at a Chinese bank.

Before the market opening, the People’s Bank of China (PBOC) set the midpoint rate at a near one-week low of 6.7602 per dollar, 380 pips or 0.56% weaker than the previous fix of 6.7222.

China’s yuan retreats from 6-month high on weak GDP data, holiday dollar demand

The move in the official guidance was the biggest one-day weakening in percentage terms since Dec. 16, to reflect spot yuan weakness a day earlier.

Such weakness persisted on Wednesday. The onshore yuan opened at 6.7780 per dollar and eased to a low of 6.7889, the weakest level since Jan. 10. By midday, it was changing hands at 6.7877, 188 pips softer than the previous late session close.

The yuan’s value against its major trading partners weakened past the key 100 level to 99.91 on Wednesday, down 0.55% from the previous session, the lowest since Jan. 5, according to Reuters calculations based on official data.

Analysts and economists said they expect the seasonal disturbances were likely to fade after the holiday.

“Near-term, a likely seasonal slowdown in exporters’ FX selling following the Lunar New Year, and a likely reversal of counter-cyclical measures including the 20% USD required reserves (URR), may tame the CNY’s momentum,” analysts at Standard Chartered said in a note. “This is particularly the case this year, as the exports outlook has weakened.”

The bank revised up its forecast for the yuan to trade at 6.7 at end-March from 7.05 previously.

The PBOC reinstated foreign exchange risk reserves when purchasing FX through currency forwards in September, a move that has made betting against the yuan more expensive to slow the pace of recent depreciation.

In global market, the dollar gained some support from a weakening Japanese yen after the Bank of Japan maintained ultra-low interest rates, disappointing some of the investors who had hoped the central bank would tweak its yield curve control policy further.

By midday, the global dollar index rose to 102.697 from the previous close of 102.39, while the offshore yuan was trading at 6.7878 per dollar.

One-year forward value for the offshore yuan was at 6.6398 per dollar, indicating a roughly 2.2% appreciation within 12 months.

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