China's yuan weakened against the dollar on Thursday, but losses were capped by state-owned banks selling the US currency in the domestic market to offset pressure from the stronger greenback, traders said. Major state-owned banks were seen selling dollars in the onshore forex market for a fourth consecutive day, traders said, in an apparent bid to support the renminbi after the US currency climbed in global markets on surging oil prices and strong private payroll data.
The dollar index, which tracks a basket of six other major currencies, stood at 101.44 around midday after hitting 101.83 overnight, close to a 13-1/2-year high of 102.05 hit last week. The dollar's renewed strength came as oil prices jumped around 9 percent as oil cartel Opec agreed to cut output. The People's Bank of China set the midpoint rate at 6.8958 per dollar prior to market open, weaker than the previous fix 6.8865. The spot market opened at 6.8955 per dollar and was changing hands at 6.8944 at midday, 96 pips weaker than the previous late session close and 0.02 percent away from the midpoint.
The gap between the onshore and offshore yuan shrunk again on Thursday to around 55 pips. The offshore yuan was traded at 6.9005 per dollar around midday, less than 0.1 percent weaker than the onshore spot. 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 7.0905, 2.75 percent softer than the midpoint.
One-year NDFs are settled against the midpoint, not the spot rate. "The state banks are selling dollars in the market again today, with the midpoint setting at a stronger level than we had thought," said a Shanghai-based trader at a Chinese bank. "They were not selling dollars at a specific level, as it would be meaningless to guard one level if the dollar rises further," the trader said.