China's yuan weakened on Tuesday as speculation that US interest rates will rise by the year end fuelled dollar buying despite the central bank setting a stronger mid-point for the Chinese currency. The yuan firmed slightly in early trade as investors took advantage of a stronger central bank midpoint but swiftly reversed course once dollar buyers emerged.
The People's Bank of China set the midpoint rate at 6.6676 per dollar prior to market open on Tuesday, firmer than the previous fix 6.6873. Traders believe the People's Bank of China (PBOC) intervened in the market to stabilise the yuan when it weakened past 6.7 per dollar in mid-July for the first time in more than five years. The spot market opened at 6.6775 per dollar and was changing hands at 6.6816 at midday, 48 pips away from the previous late session close and 0.21 percent away from the midpoint.
The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 94.84, firmer than the previous day's 94.83. The global dollar index fell to 95.755 from the previous close of 95.844. The offshore yuan was trading 0.13 percent weaker than the onshore spot at 6.6905 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 6.8375, 2.48 percent weaker than the midpoint.
One-year NDFs are settled against the midpoint, not the spot rate. "Investors are anxiously seeking clues to whether the US Federal Reserve will raise interest rates in the near term," said a trader at a European bank in Shanghai. "Once the US hike the rates, the yuan may breach the important 6.7 level," he said.