Yuan firms as PBOC signals intent to stabilise decline

By Winni Zhou and Andrew Galbraith

SHANGHAI (Reuters) - China's yuan strengthened against the dollar on Thursday, despite the central bank setting its official midpoint past the key level of 7-per-dollar for the first time since global financial crisis.

The People's Bank of China (PBOC) set the midpoint rate at 7.0039 per dollar prior to the market open, 43 pips weaker than the previous fix of 6.9996.

While this was the weakest central bank fixing since April 21, 2008, it was firmer than market expectations and seen as a signal that authorities wanted to stabilise the decline in the currency following this week's sharp falls.

Broad weakness in the official guidance rate came after heavy losses in the spot yuan, as tensions between China and the United States spread to foreign exchange policy with Washington earlier this week declaring China a currency manipulator.

On Monday, the onshore currency weakened past the psychologically important 7 per dollar mark for the first time in 11 years.

"After the market broke 7, it was just a matter of time before the fixing broke the same level," said Frances Cheung, head of Asia macro strategy at Westpac in Singapore.

The onshore spot market opened on Thursday at 7.0402 per dollar and was changing hands at 7.0425 at midday, 171 pips firmer than the previous late session close. Its offshore counterpart was trading at 7.0659 per dollar, recovering from Wednesday's close of 7.0823.

Although the yuan stablised on Thursday, the onshore spot rate has already lost 2.1% of its value to the greenback since U.S. President Donald Trump said last week he would impose fresh tariffs on the remaining $300 billion of Chinese imports from Sept. 1.

Investors have been closely tracking the PBOC's official fixing this week looking for clues on Beijing's currency stance to guide their yuan positions, as they were worried that the extended trade war between China and the United States could become a currency war.

Ken Cheung, senior Asian FX strategist at Mizuho Bank in Hong Kong, said the fixing confirmed the psychologically key level was not the "red line" for the yuan.

"USD/CNY trading above 7 is a new reasonable equilibrium. And PBOC signals to allow gradual RMB depreciation at an orderly pace," he said.

"PBOC is less committed to keeping RMB steady after the breakdown of trade talks."

Analysts said Thursday's midpoint was much stronger than their forecasts, suggesting the central bank might have used the so-called "counter-cyclical factor" intensively.

The counter-cyclical factor, first introduced in May 2017 to the midpoint formula, is widely interpreted by the market as an official tool to reduce price swings and temper depreciation expectations.

On Thursday, the official guidance rate was 0.24% stronger than Reuters' estimate of 7.0205 per dollar.

Against a basket of 24 currencies created by the China Foreign Exchange Trading System, or CFETS, yuan's value fell to 91.99, the lowest level since the index was introduced at the start of 2015, according to Reuters calculation based on official data.

The CFETS index is only published once a week.

In an effort to slow the yuan's decline, China's major state-owned banks have this week been active in the yuan forwards markets, using swaps to curb dollar supply, sources told Reuters on Wednesday.

Four sources with knowledge of the matter said that state banks were seen swapping yuan for dollars in onshore forwards market to support the Chinese unit. Buy-sell swaps help to reduce the supply of dollars that the market can access to short-sell the yuan.

Market participants believe major state-run banks often act on behalf of the PBOC in the country's foreign exchange market.

(Reporting by Winni Zhou and Andrew Galbraith; Editing by Simon Cameron-Moore)