Yuan eases

China's yuan eased against the US dollar on Friday amid growing corporate demand for the greenback, but appeared little fazed for now by escalating Sino-US trade tensions. Fears of a trade war between the world's two largest economies jolted China's equity, bond and commodity markets in morning trade, as increasingly heated rhetoric between the United States and China spooked investors worldwide. While China is threatening retaliatory tariffs and other measures, analysts do not believe any response would spread to its currency policy.
"It is unlikely that China will use FX as a tool in response to US tariff. The risk of expectations being firmed up for RMB depreciation is not desirable for China which tries to promote RMB status and assets," analysts at Westpac said in a note. However, given that the dollar tends to weaken during periods of trade tensions, the attention of China's central bank may now be shifting from curbing outflows to resisting pressure for the yuan to appreciate, OCBC said in a note on Thursday.
The dollar eased against a basket of currencies on Friday as trade concerns triggered a bout of investor risk aversion. Prior to the market opening, the People's Bank of China set the midpoint rate at 6.3272 per dollar, 105 pips or 0.17 percent weaker than the previous fix of 6.3167. In the spot market, the yuan opened at 6.3305 per dollar and was changing hands at 6.3313 at midday, 25 pips weaker than the previous late session close and 0.06 percent softer than the midpoint.
If the yuan ends the late night session at the midday level, it would finish the week largely flat. Last week, the Chinese currency rose 0.1 percent versus the greenback. "Corporate flow remained the key factor deciding the yuan's movement," said a trader at a foreign bank in Shanghai. Several traders said some big Chinese banks were selling one-year dollar contracts against onshore yuan in the swap market, adding such operations could be interpreted as a "natural" reaction after the US Federal Reserve raised interest rates.
The one-year contract fell to a low of 780 points on Friday morning, the lowest level since September 2017. As of midday, it was traded at 835 points. The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 96.87, weaker tthan the previous day's 97.02. The global dollar index fell to 89.614 from the previous close of 89.857. The offshore yuan was trading 0.01 percent weaker than the onshore spot at 6.3318 per dollar.