SHANGHAI: China's yuan weakened marginally on Wednesday amid concerns that deflationary risks are growing, increasing the need for more policy easing.
The People's Bank of China set the midpoint rate at 6.1315 per dollar prior to the market open, weaker than the previous fix of 6.1295.
The yuan has been weakening against the dollar since late last year, mostly reflecting the dollar's massive rally as the US economy has improved, fuelling expectations of a Federal Reserve rate rise this year.
A raft of weak Chinese economic data have also raised expectations that the People's Bank of China might intervene to guide the yuan lower. Consumer inflation was weaker than expected in January and factory deflation worsened, while the country's trade performance slumped last month.
Spot yuan opened at 6.2450 per dollar and was changing hands at 6.2418 at midday, 2 pips weaker than the previous close and 1.80 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 central bank is widely expected to loosen policy further after cutting bank reserve requirements last week for the first time in over two years, seen as a mostly defensive move against capital outflows. That followed a surprise cut to benchmark interest rates in November, also the first such move in more than two years, to lower borrowing costs and support growth.
Traders remained sceptical, however, that the central bank would allow a major depreciation of the yuan, which could trigger more outflows.
"The weak data yesterday didn't have much impact on markets," said a currency trader at the Japanese bank Mizuho in Shanghai.
"The overall trend for the yuan should remain a gradual appreciation."
The offshore yuan was trading 0.06 percent weaker than the onshore spot at 6.2453 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 6.3665, -3.69 percent away from the midpoint.
One-year NDFs are settled against the midpoint, not the spot rate, and now that the trading band has been widened to 2 percent in either direction, corporates are much warier of using the NDF to hedge given the basis risk inherent in them.
As a result the market has lost liquidity in recent years and has frequently proven an unreliable measure of market sentiment.
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