China's yuan weakens, speculation of further depreciation grows

China's yuan slipped further on Tuesday to a fresh six-year low after the central bank set a weaker guidance rate, fueling market expectations that it may allow further depreciation and triggering dollar purchases, traders said. The weakness in the Chinese currency was a result of strength in the dollar in the global markets.
A gauge of the greenback strength rose and pushed the yuan through the psychologically important 6.7 level on Monday. The global dollar index rose to 97.082 from the previous close of 96.929. State-owned banks quickly leapt to defend the 6.7 level when it was breached in mid-July but have not been seen buying yuan heavily so far this week, adding to questions over whether China was allowing the currency to resume its gradual descent after steadying it through much of the summer ahead of major political events.
The People's Bank of China set the midpoint rate at 6.7098 per dollar prior to the market open on Tuesday, weaker than the previous fix of 6.7008. The spot market opened at 6.7055 per dollar and was changing hands at 6.7118 at midday, 74 pips weaker than the previous late session close and 0.03 percent softer than the midpoint. The yuan has now fallen 3.2 percent against the dollar so far this year. "The willingness to purchase dollars was strong today, as investor sentiment for a weaker yuan firmed," said a Shanghai-based trader at a Chinese bank.
"In the short term, the market will not stop purchasing dollars to allow a softer yuan, unless the authorities put the brakes on it," the trader said, suggesting there was no suspected intervention from the central bank to prop up the currency so far in morning trade. He expected the central bank would allow a slow depreciation to the 6.8 level by the end of this year, roughly in line with the market consensus. The yuan pared losses on Monday as traders grew cautious about possible intervention. Analysts said the fear of potential central bank action eased on Tuesday, and investors started to chase the rising greenback.