Yuan eases on weaker fixing, market awaits Fed decision…

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SHANGHAI, Sept 26 – China’s yuan eased against the U.S. dollar in thin trade on Wednesday, reflecting a weaker official midpoint, as the market waited to see what the U.S. Federal Reserve does at a policy meeting and how its Chinese counterpart reacts. At its two-day meeting ending later on Wednesday, the Fed is expected to increase U.S. interest rates for the third time this year. Yuan traders will be watching the People’s Bank of China’s response to the Fed’s action and statement wording. In March, the PBOC raised short- and medium-term rates right after a Fed hike, while in June China’s central bank stood pat after a U.S. increase. Most yuan traders and analysts expect China to keep the borrowing costs on hold this time. “The PBOC is expected to leave its 7-day reverse repo yield unchanged at 2.55 percent akin to Fed’s meeting in June, given PBOC’s easing bias,” Ken Cheung, senior Asian FX strategist at Mizuho Bank in Hong Kong, said in a note. “We do not look for the return of RMB depreciation pressure after the Fed’s anticipated rate hike, which had been fully priced in.” Cheung added that China’s central bank has “successfully” anchored yuan expectations following a slew of market stabilizing measures since August. At present, the interest rate on China’s benchmark bond is about 60 basis points higher than on the U.S. one . In June, the gap was more than 70 bps, and traders say any further narrowing could increase capital outflows from China. Prior to Wednesday’s market opening, the PBOC set the yuan’s midpoint rate at 6.8571 per dollar, the weakest level since Aug. 24, and 131 pips or 0.19 percent weaker than the previous fix of 6.8440. In the spot market, the onshore spot yuan opened at 6.8718 per dollar and was changing hands at 6.8703 at midday, 93 pips weaker than the previous late session close and 0.19 percent softer than the midpoint. On Wednesday morning, the onshore spot yuan traded in a thin range of less than 60 pips. “Losses in the spot yuan rate reflected a weaker midpoint. But given the global dollar index stabilised around 94 level in recent sessions, the Chinese unit did not move much,” a trader at a Chinese bank said. In the near term, traders expect the yuan to track the dollar’s movement after the Fed decision. They also said any escalation in Sino-U.S. trade tensions could pile depreciation pressure on the Chinese currency. Some market participants also said they were unwilling to hold large positions for their proprietary trade, amid global market uncertainty, during China’s coming lengthy public holiday. The week-long National Day holiday begins on Oct. 1. The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 92.76, weaker than the previous day’s 92.87. The global dollar index rose to 94.143 from the previous close of 94.133. The offshore yuan was trading 0.01 percent firmer than the onshore spot at 6.8697 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 6.9523, 1.37 percent weaker than the midpoint. One-year NDFs are settled against the midpoint, not the spot rate. The yuan market at 0414 GMT: ONSHORE SPOT: Item Current Previous Change PBOC midpoint 6.8571 6.844 -0.19% Spot yuan 6.8703 6.861 -0.14% Divergence from 0.19% midpoint* Spot change YTD -5.29% Spot change since 2005 20.47% revaluation Key indexes: Item Current Previous Change Thomson 92.76 92.87 -0.1 Reuters/HKEX CNH index Dollar index 94.143 94.133 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 percent from official midpoint rate it sets each morning. OFFSHORE CNH MARKET Instrument Current Difference from onshore Offshore spot yuan 6.8697 0.01% * Offshore 6.9523 -1.37% 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 Winni Zhou and John Ruwitch; Editing by Richard Borsuk)

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