China's yuan weakened against the dollar on Friday as corporate demand for dollars eclipsed the sales by state banks to support the fragile currency. The People's Bank of China set the midpoint rate at 6.9463 per dollar prior to the market opening, weaker than the previous fix of 6.9435, further pressuring the yuan.
Ahead of the holidays, market participants were liquidating their positions to guard against the risk of being caught out by unexpected moves during their absence. Traders said corporate dollar demand remained strong on Friday, forcing major state-owned banks to sell dollars in morning trade in an attempt to stabilise the yuan at around 6.95 per dollar level. "But dollar sales by the state banks were not strong," said a trader at a Chinese bank in Shanghai, noting that the banks would be reluctant to burn through too much of their foreign exchange reserves by year end. Chinese authorities have already run down their foreign reserves by around $280 billion so far this year to support the local currency.
State-owned banks have regularly sold dollars over the past two months in what traders believe is part of efforts to prevent the Chinese yuan from falling too rapidly after the currency tumbled to 8-1/2-year lows last month. The spot market opened at 6.9497 per dollar and was changing hands at 6.9500 at midday, 60 pips weaker than the previous late session close and 0.05 percent softer than the midpoint. The yuan is set to close broadly flat against the dollar for the week, but is down more than 6 percent so far this year. Some analysts said the yuan is unlikely to breach the psychologically important level of 7-per-dollar by the close of this year, but concede that depreciation pressure remains strong and is likely to extend into 2017.