China's yuan weakened on Monday despite signs that it is almost certain to be included in the International Monetary Fund (IMF) currency basket, as the dollar gained against major currencies. Traders said dollars were in greater demand after a series of deadly attacks in Paris.
"The euro slipped after the Paris attacks and some investors turned to buy dollars," said a trader at a Chinese commercial bank in China. "It boosted the dollar and thus the yuan softened." Some expect retail demand for yuan to rise in the run-up to its expected inclusion in the IMF's currency reserve basket, with AXA analysts predicting that central banks and other institutions will buy around $600 billion worth of yuan after the IMF makes its official decision on November 30.
US Treasury Secretary Jack Lew told senior Chinese officials on Sunday he would support adding the yuan currency to the basket on which the IMF's Special Drawing Rights (SDRs) unit is based if it meets the IMF's criteria. But so far, the trading community remains focused on other factors. "Joining the SDR cannot boost the value of the yuan in the short term. Even if was to be announced the yuan would be included in the SDR this month, it will not take effect until next year when the IMF adjusts the proportion of currencies in the basket, and the proportion of the yuan is likely to be small," said Wan Zhao, an analyst at China Merchant Bank in Shanghai.
In addition, thanks to controls in China's capital account, it remains difficult for foreign investors to get their hands on yuan-denominated assets, thanks to quotas limiting onshore investment and a relatively limited pool of offshore yuan instruments. Before the market open, the People's Bank of China set the midpoint rate at 6.3750 per dollar, weaker than the previous fix 6.3655. The spot market opened at 6.3748 per dollar and was changing hands at 6.3785 at midday, 45 pips weaker than the previous close and 0.05 percent easier than 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 market has returned to discounting the yuan, seen as a sign of foreign caution, with the CNH trading 0.62 percent softer than the onshore spot at 6.4185 per dollar. The central bank has repeatedly intervened in onshore and offshore markets, including futures markets, to hold the yuan steady. In a related development, China's central bank and commercial banks bought a net 12.9 billion yuan ($2.02 billion) worth of foreign exchange in October, data showed on Sunday, stemming heavy sales in the previous three months that underlined capital outflows.
Analysts say the government's efforts to step up monitoring of foreign exchange transactions and a rebound in the stock market may have limited capital outflows, for now. But the pressure may persist, as the Chinese economy still faces downward pressures and the US Federal Reserve is set to raise interest rates at some point, they said.
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