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UPDATE 2-China's yuan sinks to six-year low, then erases losses
October 10, 2016 / 3:17 AM / a year ago

UPDATE 2-China's yuan sinks to six-year low, then erases losses

* Yuan reaches weakest since Sept 2010 before rebounding
    * Traders say rebound is a 'technical' one
    * Onshore market had been shut since Sept 30

 (Adds quotes, latest yuan level, tables)
    By Winni Zhou and John Ruwitch
    SHANGHAI, Oct 10 (Reuters) - China's yuan fell to its lowest
level in six years early Monday, breaching a key psychological
threshold, before erasing the losses on the first day of trading
after a week-long holiday.
     Traders said the weakening of the yuan reflected
strength in the dollar last week, and they did not see any signs
of intervention by state banks to support the yuan after it
fell.
     In mid-July, when the yuan last breached the 6.7 mark,
state banks intervened heavily. 
     Some China watchers have wondered if any signs of yuan
weakness following the holiday would signal that Beijing was
putting the currency back on a slow depreciation path after
holding it steady through September.
     The currency fell after the People's Bank of China set the
midpoint at 6.7008 yuan per dollar, its weakest fix
since September 2010 and about 0.3 percent weaker than the
setting on Sept. 30, before a one-week National Day holiday.
     The spot market opened at 6.6904 per dollar, quickly fell
below the key 6.7 level for the first time since July and traded
as low as 6.7051, the weakest rate since September 2010.
     Then it began to pare losses, and at 0403 GMT was changing
hands at 6.6991, or 246 pips weaker than the
Sept. 30 late session close and 0.03 percent firmer than that
day's midpoint.
     A trader at a foreign bank in Shanghai said the market "is
actually quite calm now as the willingness to purchase the
dollar is not strong. And the yuan has been pulled back to
around 6.7 level after some investors sold the greenback after
the yuan hit 6.7050 as they were afraid the central bank would
soon step into the market to stabilise."
     "The market is holding a wait-and-see approach towards the
central bank attitude," he added.
     Another trader at a European bank in Shanghai said "so far
we haven't seen any central bank actions",  though he added that
it's possible the yuan could soon breach the 6.75 level "if the
central bank does not show up at all"." 
     Late last week, the central bank announced that its foreign
exchange reserves dropped for a third month in September, by
more than expected, suggesting fresh capital outflows from the
world's second-largest economy.
    
     STRENGTHENING DOLLAR
     Pressure has also risen on the yuan recently as the U.S.
dollar has strengthened in global markets, most recently on the
back of strong labour market data that supports a possible U.S.
interest rate hike later this year.
     A trader at a Chinese bank said the central bank may have
loosened its grip at the 6.7 per dollar level after the yuan's
Oct. 1 official inclusion into the International Monetary Fund's
reserve basket, known as Special Drawing Rights (SDR).
     "We will have to see what the next threshold is," the
trader added.
     On Friday, the offshore yuan slumped to its lowest
rate against the dollar since Jan. 7. Offshore yuan mostly
trades in Hong Kong and is not bound by the Chinese central
bank's tight trading restrictions.
     Hong Kong markets are closed Monday for a holiday.
     In the weeks before onshore markets closed for China's long
holiday, the spot rate flirted with 6.7. The last close was at
6.6745.
     On Oct. 6, a Reuters poll of more than 70 foreign exchanges
strategists showed they expected the yuan to fall another 3
percent by next September. 
    
        The yuan market at 0403 GMT: 
    
    ONSHORE SPOT:
 Item               Current  Previous  Change
 PBOC midpoint      6.7008   6.6778    -0.34%
                                       
 Spot yuan          6.6991   6.6745    -0.37%
                                       
 Divergence from    -0.03%             
 midpoint*                             
 Spot change YTD                       -3.07%
 Spot change since 2005                23.55%
 revaluation                           
 
    Key indexes:
     
 Item            Current     Previous  Change
                                       
 Thomson         94.81       95.09     -0.3
 Reuters/HKEX                          
 CNH index                             
 Dollar index    96.526      96.632    -0.1
 
    
    
*Divergence of the dollar/yuan exchange rate. Negative number
indicates that spot yuan is trading stronger than the midpoint.
The People's Bank of China (PBOC) allows the exchange rate to
rise or fall 2 percent from official midpoint rate it sets each
morning.

    OFFSHORE CNH MARKET   
  
 Instrument            Current   Difference
                                 from onshore
 Offshore spot yuan    6.7085    -0.14%
        *                        
 Offshore              6.874     -2.52%
 non-deliverable                 
 forwards                        
               **                
 
*Premium for offshore spot over onshore 
**Figure reflects difference from PBOC's official midpoint,
since non-deliverable forwards are settled against the midpoint.
. 

    
 (Reporting by John Ruwitch and Winni Zhou; Editing by Richard
Borsuk)

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