China's yuan slipped against the US dollar on Tuesday, after the global dollar index rose to nearly one-week highs, but much of the focus was on offshore trade as yuan deposit rates in Hong Kong spiked to more than 6 percent. Offshore yuan liquidity was squeezed at the end of last year as Beijing's tightening measures to stem capital outflows made offshore yuan rates more vulnerable to cross-border fund flows.
The overnight deposit rate rose to its highest since January 6, though there was no talk of fresh tightening measures. The People's Bank of China set the midpoint rate at 6.879 per dollar prior to the market open, weaker than the previous fix of 6.8743. In the spot market, the yuan opened at 6.8790 per dollar and was changing hands at 6.8854 at midday, 104 pips weaker than the previous late session close and 0.09 percent weaker than the midpoint.
Ending the setting of a daily fixing rate would be consistent with how the authorities described their move toward a more market-based exchange rate to the IMF, said Condon. The global dollar index rose to 101.21 from the previous close of 100.95. The offshore yuan was trading 0.28 percent stronger than the onshore spot at 6.8662 per dollar, extending its edge slightly from Monday.
However, 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 7.1075, or 3.21 percent weaker than the midpoint, highlighting the market's bearish longer-term view. One-year NDFs are settled against the midpoint, not the spot rate. "The spot yuan market is quite stable today and generally traces the global dollar's movements," said a trader at a Chinese bank in Shanghai.
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