China's yuan retreats from two-week high, strong guidance limits losses

SHANGHAI, Sept 18 (Reuters) – China’s yuan retreated from a two-week high against the dollar on Monday, pressured by corporate demand for the greenback, but a persistently strong official fixing limited the losses. Prior to market opening, the People’s Bank of China (PBOC) set the midpoint rate, around which the yuan is allowed to trade in a 2% band, at a five-week high of 7.1736 per dollar, 50 pips firmer than the previous fix at 7.1786. The PBOC’s months-long trend of setting firmer-than-expected official guidance fix is widely seen by markets as an attempt by policymakers to stem rapid yuan declines. Monday’s official fixing was 971 pips stronger than Reuters’ estimate of 7.2707. That helped lift the yuan’s value against its major trading partners to 98.65, the highest since May 29, according to Reuters calculation based on official data. The yuan is now down 0.02% against its basket of currencies year-to-date, but against the dollar it has tumbled more than 5% over the same period. “We look for some downside to USD/CNY in the short run, given a slew of upside economic surprises and the PBOC’s continued effort to cap USD/CNY’s upside,” analysts at Barclays said in a note. “Daily fixings still record large deviations from the market consensus in favor of CNY strength, suggesting current spot levels still remain uncomfortable for the central bank.” In the spot market, the onshore yuan opened at 7.2824 per dollar and was changing hands at 7.2861 at midday, 101 pips weaker than the previous late session close. The onshore yuan rallied to a high of 7.24 on Friday, the strongest level since Sept. 1. Traders said some corporate clients took advantage of the strength in the yuan to convert dollars, but markets were cautious before a string of global central bank policy-setting meetings this week, including the U.S. Federal Reserve, the Bank of England and Bank of Japan. Downside room for the yuan is also limited, currency traders said, as the central bank has stepped up efforts to stabilize the currency. “Offshore yuan liquidity has consistently shown signs of tightness in recent weeks,” while the PBOC has also underscored its resolve to keep a tight grip on the yuan, said a trader at a foreign bank. Hong Kong’s offshore yuan CNH HIBOR, a gauge that measures the offshore yuan liquidity conditions, has remained elevated over the past few weeks. The higher offshore yuan funding cost effectively erodes carry advantage of the Chinese currency and makes it more expensive to short the yuan. By midday, the global dollar index fell to 105.278 from the previous close of 105.322, while the offshore yuan was trading at 7.2899 per dollar. The yuan market at 0310 GMT: ONSHORE SPOT: Item Current Previous Change PBOC midpoint 7.1736 7.1786 0.07% Spot yuan 7.2861 7.276 -0.14% Divergence from 1.57% midpoint* Spot change YTD -5.30% Spot change since 2005 13.59% revaluation Key indexes: Item Current Previous Change Thomson 0.0 Reuters/HKEX CNH index Dollar index 105.278 105.322 0.0 *Divergence of the dollar/yuan exchange rate. Negative number indicates that spot yuan is trading stronger than the midpoint. The People’s Bank of China (PBOC) allows the exchange rate to rise or fall 2% from official midpoint rate it sets each morning. OFFSHORE CNH MARKET Instrument Current Difference from onshore Offshore spot yuan 7.2899 -0.05% * Offshore 7.1073 0.93% non-deliverable forwards ** *Premium for offshore spot over onshore **Figure reflects difference from PBOC’s official midpoint, since non-deliverable forwards are settled against the midpoint. . (Reporting by Shanghai Newsroom Editing by Shri Navaratnam)