China's yuan fell against the dollar on Monday after the central bank set a weaker midpoint to reflect dollar strength on rising expectations of a US interest rate hike in December. Trading volume was thin in early trade as market players awaited clues on which direction the yuan will move and whether the central bank will come into the market again if the yuan falls, traders said.
The People's Bank of China set the midpoint rate at 6.3578 per dollar prior to market open, weaker than the previous fix 6.3459. The spot market opened at 6.3611 per dollar and was changing hands at 6.3603 at midday, 73 pips weaker than the previous close and 0.04 percent weaker than the midpoint. The spot rate is currently allowed to trade within a range 2 percent above or below the official fixing on any given day.
"There's no direction in the market now and we are waiting for clues," said a trader at a Chinese bank in Shanghai. The yuan was still under downward pressure, but market participants were not eager to sell, being wary of intervention from the central bank, the trader said. The offshore yuan was trading 0.38 percent weaker than the onshore spot rate at 6.3845 per dollar.
Strong growth in the number of US jobs last month bolstered the case for a December interest rate hike by the Federal Reserve, where officials had already begun to worry the economy might eventually overheat without higher borrowing costs. The dollar index was hovering around seven-month highs. 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 6.547, or 2.89 percent weaker than the midpoint.
One-year NDFs are settled against the midpoint, not the spot rate, and now that the trading band has been widened to 2 percent in either direction, corporates are much warier of using the NDF to hedge given the basis risk inherent in them. As a result the market has lost liquidity in recent years and has frequently proven an unreliable measure of market sentiment.
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