SHANGHAI: The yuan fell slightly against the dollar on Tuesday after the People's Bank of China (PBOC) set its mid-point at a two-month low in reaction to a dollar that traded close to a two-year high against the euro.
Traders said the central bank is likely to set the official midpoint rate at a year-to-date low against the dollar soon, adding that this may occur as early as this week if the euro sinks below 1.25 versus the dollar.
In other news, the China Foreign Exchange Trade System announced on Tuesday that it would kick off yuan-yen direct trading on Friday, China's latest move to internationalise the Chinese currency.
Spot yuan was trading at 6.3489 per dollar at midday, slightly weaker than Monday's close of 6.3450.
The PBOC set the day's midpoint, the base exchange rate from which the yuan can rise or fall by 1 percent on a given trading day, slightly weaker at 6.3262 compared with 6.3326 on Monday.
Tuesday's midpoint is the weakest fixing since March 15 and is within an arm's reach of the year-to-date low set on that day, at 6.3359.
The PBOC has recently set a series of midpoints stronger than the yuan's trading level, as it seeks to keep the exchange rate relatively stable, but it has also signalled that it would tolerate a measured depreciation.
"The PBOC has given initial signal that it may allow more yuan appreciation by setting the mid-point at a more than two-month low today," said a trader at a European bank in Shanghai.
"I think the level of the euro's value at 1.25 vs dollar will be crucial for the PBOC to decide whether to let the yuan midpoint fall below its 2012 low against the dollar."
YUAN-YEN
Japan and China will start trading their currencies directly in Tokyo and Shanghai from June 1 in a move that shores up trade and financial ties between Asia's two biggest economies and also marks another step to raise the yuan's international role.
The step eliminates the use of the dollar to set the exchange rate and follows an agreement struck by the leaders of the two countries in December, which also involves Japan buying Chinese government debt and efforts to forge a free trade pact between China, Japan and South Korea.
Dealers said the near-term effect would be probably higher trading volumes and lower costs.
"Direct yuan-yen trading is likely to cut trading costs, boosting yuan-yen trading liquidity," said a dealer at a foreign bank in Shanghai.
"Most yuan trading against the yen now goes through the dollar, because traders refer to dollar-yuan value to price yen-yuan."
Others said broader impact would be limited.
"From what I can see, it doesn't actually include any opening up of the capital account at all. It just allows a direct cross to be traded rather than actually increasing the amount of flow that can happen onshore to offshore," Dominic Bunning, currency strategist at HSBC in Hong Kong, said.
"It seems to be more of a technical issue rather than a major development."
Against the dollar, the yuan has shed 0.6 percent this month and 0.9 percent so far this year under pressure from a strengthening dollar in global markets as well as China's worse-than-expected economic slowdown.
Growth in China's gross domestic product slowed to a near three-year low of 8.1 percent in the first quarter. Many economists now expect GDP growth could fall below 8 percent in the second quarter.
Offshore one-year non-deliverable yuan forward contracts continued to trade at a premium to the spot price, changing hands at 6.4080 in the afternoon session for a discount of 1.28 percent to Tuesday's midpoint.
Offshore spot yuan was trading around 6.3462 in morning trade, largely in line with the onshore spot yuan trend.