Yuan firms on state bank support, signs trade tensions easing

SHANGHAI: China's yuan closed slightly firmer on Tuesday as early support from major state-owned Chinese banks lifted the currency from near-decade lows, and sentiment improved after media reports fueled hopes for a de-escalation in the Sino-U.S. trade war.

The onshore yuan ended domestic trade at 6.9531  per dollar at 4:30 pm (0830 GMT), 113 pips, or 0.16 percent, firmer than the previous late night close.

State-run Chinese banks were seen selling dollars at around 6.97 yuan per dollar in the onshore spot foreign exchange market in early trade, three traders said, in an apparent attempt to halt a sharp slide in the yuan.

The move effectively offset broad strength in the greenback, which hovered near a 16-month high versus a basket of major world currencies.

Prior to the market opening on Tuesday, the People's Bank of China (PBOC) lowered the midpoint rate for a fourth straight day to 6.9629 per dollar, 153 pips or 0.22 percent weaker than the previous fix of 6.9476.

Tuesday's fixing was the weakest since Nov. 1.

"The 6.97 per dollar level offers strong support currently. It's a level that the central bank would firmly protect for now," said a chief trader at a Chinese bank.

Heavy dollar demand from both corporate clients and traders' proprietary accounts eased in the afternoon following a South China Morning Post report saying Vice Premier Liu He was expected to visit the United States shortly for talks ahead of a meeting between the two countries' leaders.

Market participants suspect authorities want to prevent the yuan from weakening too sharply before a meeting between U.S. President Donald Trump and Chinese President Xi Jinping on the sidelines of a G20 gathering in Argentina in late November through early December.

While markets do not expect the meeting to produce a breakthrough agreement to end the tariff war, there are signs that diplomatic tensions may be easing.

U.S. Treasury Secretary Steven Mnuchin has resumed discussions with Vice Premier Liu, with the two speaking by telephone on Friday, the Wall Street Journal reported citing sources.

Still, as the yuan approached the psychologically critical 7 per dollar again, the intervention by state banks on Wednesday has revived the debate over how strongly the central bank will defend that level if China's economy continues to cool and the U.S. trade battle worsens.

Ken Cheung, senior Asian FX strategist at Mizuho Bank in Hong Kong said he was maintaining his call that Beijing will stop the yuan from weakening beyond 7 per dollar for the rest of this year.

"The PBOC clarified its stance to defend the RMB exchange rate to anchor RMB expectations. Following PBOC deputy governor Pan's warning on RMB short-sellers, the PBOC said it would reinforce macro-prudential management to keep RMB exchange rate at reasonable and equilibrium level if necessary," Cheung said in a note.

In the offshore market, signs of liquidity tightness also lent support for the Chinese unit.

Hong Kong's offshore yuan overnight borrowing rate, or HIBOR, was fixed at 2.68800 percent on Tuesday, about 1.3 percentage points higher than the previous day's fix of 1.41367 percent. And Tuesday's fix was the highest since Oct.11.

At 0830 GMT, the offshore yuan was trading at 6.9507 per dollar.

Separately, former U.S. Federal Reserve chair Janet Yellen told a forum in Beijing that she expects further tightening in the United States and sees additional downward pressure on the Chinese currency.

"Over the next year, I anticipate that the Fed will boost rates three or four additional times to stabilize the unemployment rate," Yellen said in a live video representation broadcasting at the forum.

"Now PBOC is on a path of easing monetary policy somewhat, (and it is) the homegrown Chinese factor that's placing downward pressure on the currency and triggering some capital outflows," she said, adding her understanding was that the PBOC was "trying to resist" a depreciation of the yuan.