China's yuan weakened sharply on Monday, as unexpectedly large foreign exchange sales by the central bank in July rekindled fears of capital outflows. The People's Bank of China (PBOC) sold a net 190.5 billion yuan ($28.7 billion) worth of foreign exchange in July according to Reuters calculations based on central bank data released on Sunday, which was the largest increment since March. The PBOC set the midpoint rate at 6.643 per dollar prior to market open, firmer than the previous fix 6.6543.
The spot market opened at 6.6438 per dollar and was changing hands at 6.6475 at midday, 146 pips away from the previous late session close and 0.07 percent weaker than the midpoint. The spot rate is currently allowed to trade with a range 2 percent above or below the official fixing on any given day. The offshore yuan was trading -0.10 percent away from the onshore spot at 6.654 per dollar. 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 6.7715, -1.90 percent away from the midpoint. One-year NDFs are settled against the midpoint, not the spot rate.
After weakening sharply in late June and early July following Britain's shock decision to leave the European Union, the yuan strengthened against the dollar in the second half of July, in what analysts say represented the central bank's determination to head off renewed speculation about a sharp depreciation in the yuan this summer.
Traders said the sharp fall on Monday was not unexpected given the foreign exchange sales data released over the weekend. "The data release was a factor today, but broadly I think we can expect the yuan to stay range bound for now," said a trader at a commercial bank in Shanghai. "With the G20 coming up in Hangzhou, the central bank won't want to see a lot of volatility." The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 95.1, firmer than the Friday's close of 95.2. The global dollar index rose to 95.749 from the previous close of 95.722.