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China's yuan slips as mainland stocks slide

HONG KONG (Reuters) - China's yuan edged lower on Wednesday as stocks fell over 2 percent in opening trades, though a broadly flat yuan fixing checked sharp losses for the currency.

Stocks plunged more than 6 percent on Tuesday, their biggest fall in three weeks, on speculation the central bank may be in no rush to ease policy further and amid concerns a further weakening in the yuan would hit importers.

Traders in China's currency markets have been wary of sharp swings in daily fixing rates after the central bank's surprise devaluation of its currency by nearly 2 percent on Aug. 11.

"We are in for a period of greater market volatility than ever before but a sustained devaluation is unlikely because that would deter foreign investors from investing in China's equity markets," said Benjamin Pedley, head of investment strategy - Asia at HSBC Private Bank in Hong Kong.

The People's Bank of China set the midpoint rate at 6.3963 per dollar prior to Wednesday's market open, a shade weaker than Tuesday's closing quote of 6.3938.

The spot market opened at 6.3949 per dollar and was changing hands at 6.3984 in early deals, slightly weaker than Tuesday's close of 6.3938 per dollar.

While spot yuan is currently allowed to trade in a 2 percent range around the daily fixing, last week's devaluation has caused onshore spot to trade on the weaker side of the fixing until state-owned banks stepped in to restore some calm.

In the derivative markets, implied currency volatility in offshore yuan has declined from record highs hit last week, though it remains at elevated levels as traders have begun to price in greater expected ed price swings in the yuan.

The basis spread between the offshore and onshore yuan has tightened after last week's blowout, a sign of reduced market stress.

Still, analysts expect the yuan to remain under pressure in the coming days especially with a likely rate increase from the U.S. Federal Reserve looming on the horizon.

"Historically whenever the Fed has started raising rates, emerging market currencies haven't done well," HSBC's Pedley said.

Morgan Stanley expects the yuan to weaken to 6.91 by end-2016 while Goldman Sachs expect the yuan to slip to 6.7 over the same time period.

The yuan market at a glance:

ONSHORE:

Item Current Previous Change

PBOC midpoint 6.3963 6.3966 0.00%

Spot yuan 6.399 6.3938 -0.08%

Divergence from midpoint* 0.04%

Spot change ytd -5.39%

Spot change since 2005 revaluation 29.34%

*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 6.4366 0.06%

*

Offshore non-deliverable 6.57 -2.64%

forwards **

*Premium for offshore spot over onshore

**Figure reflects difference from PBOC's official midpoint, since non-deliverable forwards are settled against the midpoint. .

GRAPHICS:

The yuan in trade-weighted terms http://link.reuters.com/sed74t

The spot market versus the trading band http://reut.rs/1MhsqOi

(Reporting by Saikat Chatterjee; Editing by Richard Borsuk)