SHANGHAI, Feb 12: China’s yuan weakened on Thursday and flirted with the lower limit of its daily trading band as data suggested the world’s second-largest economy is still losing momentum despite a series of stimulus measures. The People’s Bank of China set the midpoint rate at 6.1333 per dollar prior to market open, weaker than the previous fix of 6.1315. Trading volumes were subdued ahead of the Lunar New Year holiday beginning on Feb. 18.
Spot yuan opened at 6.2453 per dollar and was changing hands at 6.2466 at midday, 39 pips weaker than the previous close and 1.85 percent away from the midpoint. The spot rate is allowed to trade with a range 2 percent above or below the official fixing on any given day.
The yuan has been weakening steadily against the dollar since late 2014 as expectations of a U.S. rate hike in mid-2015 have pushed the greenback to a 10-year high against a basket of major currencies.
Despite the recent weakening trend, China’s currency is still up 25 percent against the dollar over the past decade, even as the nation’s growth has slowed to a twenty-four year low. As Chinese inflation, growth and exports have all drooped over the past year, speculation has risen that the People’s Bank of China might intervene to guide the yuan lower. But traders said any major move before the Lunar New Year holiday is unlikely. The offshore yuan was trading -0.05 percent away from the onshore spot at 6.2495 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 6.374, -3.78 percent away from the midpoint.
One-year NDFs are settled against the midpoint, not the spot rate, and after the trading band was widened last year to 2 percent in either direction companies are much warier of using the NDF to hedge given the basis risk inherent in them. As a result, the market has lost liquidity in recent years and has frequently proven an unreliable measure of market sentiment. (AGENCIES)
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