Soothed by central bank intervention, China's currency market takes Friday snooze
By Pete Sweeney
SHANGHAI (Reuters) - The Chinese yuan flatlined on Friday, with the exchange rate barely budging and volumes low, as traders said a combination of soothing messages from regulators and buy orders from state banks kept the market in check.
The spot market (CNY=CFXS) opened at 6.3990 per dollar and changed hands at 6.3918 at market close, only 72 pips from the previous close and 0.09 percent away from the midpoint.
For the entire day, the yuan was in a tight range between 6.4050 and 6.3990.
"After a few days of volatility, the central bank appeared to want the yuan to show some stability for now, possibly also next week," said a trader at a major European bank in Shanghai.
For the week, the currency posted a record loss of around 3 percent.
On Tuesday, the People's Bank of China (PBOC) shocked global markets by guiding its daily midpoint setting down nearly 2 percent, the sharpest such adjustment in China's modern foreign exchange market.
The move, explained as a re-pegging of the midpoint fixing closer to the market rate, led the currency to fall around 3 percent in massive volumes. Official data showed spot volume of nearly $57 billion, the biggest day in Reuters records kept since May 2013.
Volumes have come down sharply and the domestic market has stabilised after the PBOC said on Thursday there was no reason for the yuan to fall further given China's strong economic fundamentals.
Volatility vanished from the spot market on Friday. Prior to Tuesday - when the PBOC said it aimed to introduce more two-way trade into the market - the exchange rate had for months also moved within a narrow 0.3 percent range, which traders blamed on intervention by state-owned banks to prop up the yuan.
The cost of that intervention now appears to be quite high, which may explain the sudden depreciation.
BIG JULY FX SALES
On Friday afternoon, government data showed China's central bank and commercial banks together sold $38.9 billion in foreign exchange in July, the biggest sales on record.
The data "showed that the central bank together with major state banks intervened heavily in July. In coming months, if the intervention eases, the data will return to normal," the trader said.
The drastic nature of Tuesday's adjustment, which came without clear warning, is still reverberating in global markets, as investors try to assess the weaker yuan's implications for Chinese consumption.
Some warned of a looming currency war, others that China was abandoning its commitment to economic restructuring, but others suggested investors may have overreacted.
"I continue to believe that the actions and words of the PBOC signal that they have taken the currency to a new starting point, and this is likely to revolve around a trade-weighted regime," said Andy Rothman, investment strategist at Matthews Asia.
"They will continue to manipulate the exchange rate, but with a less obsessive focus on the dollar."
The offshore yuan was trading at a 0.76 percent discount from the onshore spot at 6.4405 per dollar, indicating offshore investors expect further depreciation.
(Additional reporting by Lu Jianxin; Editing by Richard Borsuk)
