China's yuan extends gains on firmer fixing and state bank support

SHANGHAI: China's yuan on Wednesday extended the previous day's gain against the US dollar, which traders attributed to a significantly firmer midpoint setting and support from major state-owned banks.

Prior to market opening, the People's Bank of China (PBOC) set the yuan midpoint at 6.8053 per dollar, lifting it 239 pips from Tuesday's fixing to the strongest level since June 19.

The 0.4 percent hike for the fixing was the biggest one-day strengthening, in percentage terms, since June 1. It followed Tuesday's late surge in the spot yuan rate and overnight losses for the dollar.

In the spot market, the yuan opened at 6.8034 per dollar, rising to 6.7943 before changing hands at 6.8008 at midday, 137 pips firmer than the previous late session close and 0.07 percent stronger than the midpoint.

Gains in the yuan were supported by Chinese state-owned banks, as happened on Tuesday afternoon, traders said.

According to the traders, the state banks sold US dollars in the onshore market at around 6.80 per dollar level, an apparent attempt to keep the Chinese currency from sinking.

"Big banks were selling dollars in initial trade this morning," said one at a Chinese bank in Shanghai.

Traders believe the intention of authorities is to strengthen the yuan's mid-year rate to show the currency appreciated in the first half after weakening about 6.5 percent against the US dollar in 2016.

Gao Qi, FX strategist at Scotiabank in Singapore, said the selling of dollars was triggered by a widening gap between the yuan guidance and its close, as the closing rate was consistently weaker than the same day's fixing over the past two weeks.

"Historic data suggest the gap remaining above more than 100 pips for several consecutive sessions will herald looming sharp corrections in the yuan exchange rate," Gao said in a note. "We stay cautious in the foreseeable future as the pattern is expected to continue."

The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 94.36, firmer than the previous day's 94.19.

The global dollar index fell to 96.359 from the previous close of 96.394.

The offshore yuan was trading 0.03 percent weaker than the onshore spot at 6.8026 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 6.972, or 2.39 percent weaker than the midpoint.

One-year NDFs are settled against the midpoint, not the spot rate.