China's yuan continues to fall against dollar

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China's yuan continues to fall against dollar

SHANGHAI China's onshore currency fell to its lowest level against the dollar since the 2008 global financial crisis, while the offshore trades hit a record low, pressured by expectations of more Federal Reserve hikes.

The dollar hit a new two-decade peak against a basket of currencies, and traders said the local currency was reacting to the broad strength of the dollar in global markets. The dollar has been boosted in recent days by safe-haven demand and a hawkish Fed.

Onshore trade fell to a low of 7.2302 in early trade, the lowest since January 2008, and opened at 7.1800 per dollar. It traded at 7.2233 at midday, 433 pips softer than the previous late session close.

The offshore yuan fell as far as 7.2349, the lowest level since such data became available in 2011. It was last traded at 7.2315 around midday.

On Wednesday, corporate dollar buying was very strong, causing additional pressure on the yuan, according to several currency traders.

A trader at a foreign bank said that those who want to convert their FX receipts into yuan are holding back and waiting for better prices.

A second trader at a foreign bank said the weakness in the yuan was in line with trading in other currencies on Wednesday.

The yuan can't escape the fact that all non-dollar currencies crashed in early trades.

Prior to market opening, the People's Bank of China PBOC set the midpoint rate at 7.1107 per dollar, the lowest level in over two years, and 385 pips or 0.54 per cent weaker than the previous fix of 7.0722.

Analysts at ANZ said that the authorities have been trying to slow down the pace of depreciation by setting much stronger than expected fixings, but it is clear that there is no particular level that they are trying to defend.

In the face of further dollar strength, the authorities will allow the yuan to weaken further, but will act to make sure the move is not disorderly. The decline came even as China's central bank announced on Monday new steps to slow the pace of the yuan's recent fall by making it more expensive to bet against the currency.

The PBOC cut the amount of foreign exchange reserves that financial institutions must hold in order to slow the yuan's depreciation earlier this month.

A third trader at a Chinese bank said that the efforts by authorities to stem yuan weakness were having a limited impact.

Source told Reuters late on Tuesday that Chinese monetary authorities are asking local banks to revive a yuan fixing tool it abandoned two years ago as they try to steer and defend the rapidly weakening currency.

The CNY fixing guidance will be the primary tool to support the RMB and, if necessary, the PBOC will freeze the CNY fixing to lock the USD CNY spot at the 2 per cent upper trading limit, said Ken Cheung, chief Asian FX strategist at Mizuho Bank.

This will prove to be the least costly but effective policy to cap the USD CNY spot, Cheung said.

He expects that the authorities could take more actions, including verbal messages and window guidance, to slow the pace of yuan depreciation.

The spot yuan is trading stronger than the midpoint. The exchange rate can rise or fall 2 per cent from the official midpoint rate it sets each morning, according to the People's Bank of China PBOC.

Non-deliverable forwards are settled against the midpoint, which is reflected in the figure.