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Asia, Forex

Yuan inches up, state banks seen offering support via forwards

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SHANGHAI, Aug 21 (Reuters) – China’s yuan inched up against the dollar in thin trade on Wednesday, supported by a slightly higher midpoint, but investors were cautious ahead of a meeting of central bankers this week which is likely to stoke hopes of more stimulus measures.

Central bankers will gather at Jackson Hole, Wyoming, on Friday, with markets awaiting a speech by U.S. Federal Reserve Chair Jerome Powell. Investors expect the Fed to give clues on the prospects for more interest rate cuts in the United States, setting the tone for currencies.

Financial markets are betting on another Fed rate cut on Sept. 18, as well as easing by the European Central Bank next month. Some analysts believe China could follow and cut its new benchmark lending rate on Sept. 20.

Prior to the market opening, the People’s Bank of China (PBOC) set the midpoint rate at 7.0433 per dollar, 21 pips firmer than the previous fix of 7.0454.

In the spot market, onshore yuan opened at 7.0566 per dollar and was changing hands at 7.0605 at 0730 GMT, 5 pips firmer than the previous late session close.

The yuan had gapped weaker at the open on Tuesday and fell to a one-week low.

Two traders said major state-owned Chinese banks were seen swapping yuan for dollars in onshore forwards market since Tuesday, with their operations indicating less weakness in the future value of the yuan.

“State banks have been consistently offering recently,” said a trader at a Chinese bank.

It was unclear if the swap operations were rollovers of last year’s purchases or fresh orders. Market participants also suspected that big banks had used the dollars they acquired from the swap operations to directly sell in the spot market to prevent sharper losses in the yuan.

Major state-owned banks had used swaps to curb greenback supply earlier this month as authorities sought to slow the currency’s decline after letting it breach the key 7 to the dollar level on Aug. 5.

The yuan has depreciated 2.3% against the dollar since U.S. President Donald Trump threatened on Aug. 1 to impose more tariffs on Chinese goods, and has fallen around 11% since the first hefty U.S. levies were announced in spring last year.

Big banks used the same tactics to prop up the yuan last summer, by pushing the one-year dollar/yuan swap points into negative territory, meaning an increase in the yuan’s anticipated value against the dollar in a year’s time.

On Wednesday afternoon, the one-year dollar/yuan swap points stood at 253 points after hitting a low of 220 points, the lowest since Aug.8.

However, several traders said the declines in the swap points could be a result of renewed policy easing expectations after China trimmed its new lending reference rate on Tuesday. Analysts say the rate reforms will open the door for the PBOC to cut rates again soon in some form as the economy struggles.

Traders were also waiting for more news in the Sino-U.S. trade dispute.

U.S. President Donald Trump said on Tuesday he had to confront China over trade even if it caused short-term harm to the U.S. economy because Beijing had been cheating Washington for decades.

Separately, the offshore yuan gained some support from signs of liquidity tightness in Hong Kong.

Yuan borrowing costs edged up in the financial hub on Wednesday as seen from rises in the CNH Hong Kong Interbank Offered Rate benchmark (CNH Hibor) across tenors.

Traders and analysts suspect that the tensions could be a result of increasing yuan demand for bond buying flow into mainland.

And some believe the yuan liquidity tightness could anchor offshore yuan sentiment as rises in the borrowing costs mean shorting the Chinese currency has become more expensive.

The one-week contract rose to 3.84570%, the highest since November 2018, and was 44 basis points higher than the previous fix of 3.40620%.

Front-end CNH forward points also edged up on Wednesday.

The global dollar index rose to 98.266 as of 0730 GMT from the previous close of 98.19.

The offshore yuan was trading at 7.0652 per dollar as of 0730 GMT.

(Reporting by Winni Zhou and John Ruwitch; Editing by Kim Coghill)


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