China's yuan weakened against the dollar on Monday, pulled down by a collapsing stock market, but losses were capped by a stable central bank midpoint, traders said. China's major stock indexes tumbled more than 8 percent on Monday morning, with traders saying disappointment over the lack of widely expected monetary policy easing measures over the weekend triggered a fresh sell-off. The market had expected that the central bank would cut banks' requirement reserve ratios (RRR) to counter the economic slowdown.
"The yuan market was affected by the stock turmoil in early trade," said a trader at a Chinese commercial bank in Shanghai. "However, the central bank's relatively strong guidance rate helped stabilise the exchange rate to some extent." The People's Bank of China set the midpoint rate at 6.3862 per dollar prior to market open, slightly stronger than the previous fix of 6.3864.
The spot market opened at 6.3897 per dollar and was changing hands at 6.3978 at midday, off an intraday low of 6.3994 but was still 0.14 percent weaker than the previous close. Offshore yuan was trading 1.04 percent down from the onshore spot at 6.4648 per dollar. The basis spread between offshore yuan and the onshore spot rate expanded to its widest level in nearly four years.
"If the CNH liquidity in the offshore market continues to tighten, we could see further capital outflows from mainland China," said Zhou Hao, a senior economist at Commerzbank AG, in Singapore. "Maybe at the end of the day, China will have only two options: one is to put more control on the capital account; second is to let the currency go." Non-deliverable currency contracts (NDFs) in the offshore market for the Chinese currency was being quoted at 6.65 per dollar in early trade, a nearly 4 percent discount in 12 months to the onshore market rate. Spreads between one-year and one-month NDFs widened considerably indicating more weakness in the Chinese currency over the medium term.
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