Chinese state banks jumped in to stem yuan weakness on Friday morning after the US dollar rose broadly, but the currency remained vulnerable in the face of a relentlessly rising greenback amid expectations of higher US interest rates. The yuan touched 6.9000 per dollar in early trade after the People's Bank of China lowered its midpoint the most in seven weeks to reflect a stronger dollar.
A flood of dollar liquidity stopped it in its tracks, however. "Big state banks started to offer dollar liquidity to support the yuan right after two transactions dragged the spot rate down to 6.9 per dollar," said the trader at a foreign bank in Shanghai. The trader said demand for dollars by companies remained strong on Friday morning. An overnight decision by the European Central Bank to extend its bond-buying programme and expand purchases of short-end debt buoyed the dollar against the euro.
The PBOC set its official yuan midpoint at 6.8972 per dollar prior to the market open on Friday, 241 pips or 0.35 percent weaker compared with the day earlier, marking its biggest percentage loss since October 21. The previous fix was at 6.8731. The spot market opened at 6.8985 per dollar and was changing hands at 6.8995 at midday, hitting a low of 6.9000 before state banks stepped in to support. It was 170 pips weaker than previous late session close and 0.03 percent softer than the midpoint. The offshore yuan was trading 0.26 percent weaker than the onshore spot at 6.9174 per dollar. One-year NDFs are settled against the midpoint, not the spot rate.