SHANGHAI: China's yuan hit a seven-month low to the dollar on Tuesday and nearly touched its 2-percent daily trading limit for the first time, battered by increasingly bearish sentiment towards the currency.
As the dollar strengthens globally and emerging market currencies suffer, the yuan has slumped in December, declining 1.3 percent so far this month.
The yuan looks set to end the year down 2.8 percent, the first meaningful annual depreciation since its landmark revaluation in 2005.
In consistent efforts to control the pace of the yuan's depreciation, the People's Bank of China set its midpoint rate only slightly weaker at 6.1224 per dollar prior to market open on Tuesday, compared with the previous fix of 6.1205.
Spot yuan opened at 6.2290 and was changing hands at 6.2285 at midday, 67 pips away from the previous close and 1.73 percent away from the midpoint.
It hit an intraday low of 6.2362 in early trade, its weakest level since June 25 and 1.82 percent away from the midpoint. The spot rate is currently allowed to trade with a range 2 percent above or below the official fixing on any given day.
The offshore yuan was trading -0.10 percent away from the onshore spot at 6.2346 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 6.363, -3.8 percent away from the midpoint.
One-year NDFs are settled against the midpoint, not the spot rate, and since the trading band was widened to 2 percent in either direction earlier this year, corporates are much warier of using the NDF to hedge given the basis risk inherent in them.
As a result the NDF market has lost liquidity and has frequently proven an unreliable measure of market sentiment.
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