China's yuan falls, seen remaining weak in the near term

HONG KONG: China's yuan slipped against the dollar on Tuesday after the central bank, which over the weekend widened the currency's trading band, set a weaker midpoint fixing.

Traders said they expect the yuan to trend downward in the short-term as the Chinese economy is losing steam.

The spot yuan changed hands at 6.1853 near midday, down 0.12 percent from the previous day's close at 6.1781. The PBOC fixed the yuan midpoint at 6.1341, down 0.03 percent from Monday's 6.1321.

The yuan has fallen 2.1 percent so far this year, erasing much of its nearly 3 percent gain in 2013. The People's Bank of China (PBOC) engineered the weakness via state banks to stamp out speculative money betting on one-way yuan appreciation.

The efforts have seen some success as traders say their clients are actively buying dollars in the market either to stop loss of their long yuan positions or bet on further weakness of the yuan.

"The demand for dollars is quite strong and all the big Chinese banks are buying dollars today, but on behalf of their clients, not the central bank, which has not intervened for some time," a trader at a Chinese bank in Shanghai said.

"The yuan will remain weak in the coming one or two months as China's economy becomes sluggish, and it may fall to 6.2360 in the short term," the trader predicted.

A series of weak data and surveys has made some economists say Beijing will struggle to meet its 7.5 percent growth target this year.

Some investment banks including Bank of America Merrill Lynch and Mizuho Securities have lowered their forecast for China's 2014 GDP growth after disappointing January-February economic data.

On Saturday, the PBOC doubled the yuan's daily trading range to enable it to rise or fall 2 percent around the daily mid-point rate, an important step to make the "redback" finally fully convertible.

Yet the yuan is not likely to trade over the full width of the band in the near term, if the last band widening in 2012 offers any guidance. Near midday Tuesday, the yuan was 0.8 percent weaker than the fixing.

Some analysts believe the yuan has almost reached its equilibrium level and there's limited room for upside. However, they don't expect any significant fall of the yuan, given China's $3.8 trillion foreign exchange reserves and higher interest rates that will continue to induce capital inflows.

The PBOC has embraced a market-driven FX regime in a paradigm shift, which will lead to higher intraday volatility, said Dariusz Kowalczyk, a senior strategist at Credit Agricole. In a report dated Monday, he said he expects the yuan to fall to 6.22 in the short term before gaining momentum again to rise gradually in the long run.

"The central bank doesn't want non-stop yuan appreciation, but it certainly dislikes a trend of non-stop depreciation even more. So, you cannot expect the yuan to stage a free fall with the PBOC only being on the background," said a dealer at a major European bank in Shanghai.