Yuan extends losses after worst month since Aug 2019

SHANGHAI: China's yuan extended losses against the dollar on Thursday, after posting its biggest monthly drop since August 2019, dragged lower by broad strength in the greenback in global markets.

But trading was tepid as temporary closures of some major state-run banks in Beijing for the 100th anniversary celebrations of the Chinese Communist Party on July 1 had thinned volumes and liquidity, traders said.

Domestic financial markets are usually stable during key economic and political events.

Prior to the market opening, the People's Bank of China (PBOC) set the midpoint rate at a near one-week low of 6.4709 per dollar, 108 pips or 0.17% weaker than the previous fix of 6.4601.

In the spot market, onshore yuan opened at 6.4620 per dollar and was changing hands at 6.4640 at midday, 62 pips weaker than the previous late session close.

Traders said the weakness in the yuan was tracking broad dollar strength overnight, with many investors now anxiously awaiting a key US job report due on Friday for clues on when the US Federal Reserve will start to pare back stimulus.

A yuan trader at a Chinese bank said markets continued to bet that further strength in the dollar will pile additional downward pressure on the yuan, with many eyeing 6.5 per dollar as the next key level.

Meanwhile, despite increasing expectations for a Fed taper and interest rate hikes in the United States, many analysts believe Chinese central bank will stay put for the next two years despite a slew of recent economic indicators showing an uneven recovery in the world's second-largest economy.

"Given (recent) Chinese yuan strength, supported by a sizeable trade surplus, FDI and portfolio inflows, we believe the PBOC may wait even longer this time before responding to the Fed rate hikes," economists at Standard Chartered said in a note.

The yuan had rallied to three-year highs against a weakening dollar in spring, but retreated 1.3% in June after the Fed surprised markets by signaling rate rises may happen sooner than expected.

The yuan is still strong against a basket of currencies of China's trading partners.

The CFETS basket index breached the 98 level again and rose to 98.01 on Thursday. Markets widely believe authorities want to see 98 as the ceiling for the index. ?

A private survey on Thursday showed that China's factory activity expanded at a softer pace in June, as the resurgence of COVID-19 cases in the export province of Guangdong and supply chain woes drove output growth to the lowest in 15 months.

By midday, the global dollar index rose to 92.394 from the previous close of 92.367, while the offshore yuan was trading at 6.4688 per dollar.