Fundamental Outlook for the Yuan

• Yuan trades beyond fixed midpoint range


• Rising mainland debt levels fear

The Chinese yuan weakened on Monday as the US dollar gained momentum all over the world, despite the Dollar Index last week showing a record low for the dollar against a basket of major currencies.

"The yuan weakened inverse to the dollar's global performance, while the central bank stayed on the sidelines," said a trader at a European bank in Shanghai. "As the yuan's performance is largely stable of late, the central bank has greatly reduced its intervention in trading."

The People’s Bank of China (PBOC) set the official midpoint rate at 6.6652 against the dollar right before market open, lower than their previous 6.6211 fix. Meanwhile the yuan opened at 6.6630 against the dollar in the spot market and was trading at 6.6653 by midday, about 107 pips from the previous session close and in conformity with the midpoint. So far this year, the yuan is 2.5% lower against the US dollar and 6.8% lower against a basket of major currencies.

The most recent data released by the China Foreign Exchange Trade System (CFETS) on Friday revealed that the index for the yuan’s value based on the market’s trade-weighted basket now sits at a new low of 94.11, exceeding the previous 94.25 level seen on July 8. Many traders share the opinion that the market currently brims with an anticipation for further depreciation in the medium term. "Corporate dollar demand has remained strong despite a general yuan rebound since mid-July," said a trader at a Chinese commercial bank in Shanghai. "Investors still believe the yuan will depreciate in the foreseeable future, given the prospects of the dollar's global strengthening and of the slowdown of the growth of the Chinese economy."

Offshore yuan was trading at 6.6713 to the US dollar by 10am in Hong Kong on Friday, down 0.22%, after a previous 0.37% slump on Friday. Onshore yuan traded in Shanghai weakened by 0.16% to trade at 6.6627 to the USD. It had fallen 0.33% on Friday.

Jasper Lo Cho-yan, chief executive of King International Financial, said the weakening of the yuan followed the growing concerns over levels of mainland debt. “There were reports on Friday showing the mainland debt problems could get worse. This has hurt the yuan and added more falling pressure to the currency, I do not expect the US to increase interest rates in the near term, but the market has speculated there could be a rate rise in the US, If that happens, it would further hurt the yuan, with the currency likely to fall beyond 6.70 yuan per US dollar soon.”

Lo explained that a US interest rate rise could also lead the yuan lower, because market participants are currently paying close attention to the global central banking conference in Jackson Hole Symposium, which is scheduled to be held by the Federal Reserve this week. The major event of the meeting will be a speech on Friday by Fed chairwoman Janet Yellen with many investors looking out for any implications of a possible rate hike this year.