HONG KONG: China’s yuan weakened against the dollar as trading was limited within a narrow range on Monday, after a stronger-than-expected central bank fixing fueled speculation that the authorities’ tolerance for yuan weakness may be nearing its end.
China’s onshore market restarted trading after the three-day dragon boat festival last week.
The onshore yuan quickly fell past the 7.2 level per dollar in early trade as it tracked its offshore counterpart, whose trading continued last Thursday and Friday and ended the week at a seven-month low.
The People’s Bank of China set the midpoint rate at 7.2056 per US dollar before the market opened, weaker than the previous fix of 7.1795.
The spot yuan opened at 7.2049 per dollar and was changing hands at 7.2132 at midday, 311 pips weaker than the previous late session close and 0.11% weaker the midpoint.
The spot rate is allowed to trade with a range 2% above or below the official fixing on any day.
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“The stronger fixing may be sending a signal to the market that the central bank and policy makers are watching the yuan foreign exchange moves, especially with the recent breach of 7.2 level,” said Christopher Wong, a currency strategist at OCBC.
The offshore yuan was trading -0.03% away from the onshore spot at 7.2152 per dollar.
The currency has been weighed down by China’s faltering economic growth and the wide interest rate differential between the US and China.
Although in recent weeks China has cut loan prime rates, analysts said modest interest cuts alone would have limited impact in stimulating weak household demand without fiscal support measures.
“We still need to see how the fixing are set for the rest of this week” for more evidence on whether more intervention is forthcoming, said Khoon Goh, head of Asia research at ANZ.
The global dollar index fell to 102.748 from the previous close of 102.903.
The dollar was near a one-week high on Monday against its major peers, after the abortive mutiny in Russia over the weekend put investors on guard.
For this week, investors will be eyeing industrial profits for May on Wednesday, and the official manufacturing and non-manufacturing purchasing managers’ index (PMI) for June on Friday.
More disappointing data after the contraction shown in May’s manufacturing PMI will bolster expectations for additional state action to support the economy.
The one-year forward value for the offshore yuan traded at 7.005 per dollar, indicating a roughly 3.00% appreciation within 12 months.