May 17, 2019 / 5:26 AM / 8 days ago

Yuan slides past key 6.9/dollar mark on fresh U.S.-China tensions

    SHANGHAI, May 17 (Reuters) - China's yuan fell past the
psychologically-important 6.9 per dollar level to its weakest in
nearly five months on Friday, amid signs of an escalation in
Sino-U.S. trade tensions.
    The Chinese currency is set for a fifth straight weekly loss
and has already shed around 2.5 percent to the dollar since U.S.
President Donald Trump said on May 5 he was going to raise
tariffs on $200 billion of Chinese imports.
    Market sentiment has been hurt further by U.S. government
moves to block China's Huawei Technologies          from buying
vital American technology, throwing into question prospects for
sales at some of the largest tech companies and drawing a sharp
rebuke from Beijing.
    Traders and analysts said many corporate clients had set the
strike price for their option contracts at around 6.9 per
dollar, meaning a breach of that level could quickly send the
Chinese currency to 7. 
    The yuan has lost all its gains made this year. Markets are
now debating whether the authorities will let the renminbi
breach the 7 per dollar level, which was last seen during the
global financial crisis.    
    Prior to market opening, the People's Bank of China (PBOC)
lowered the midpoint rate to 6.8859 per dollar, 171
pips or 0.25 percent weaker than the previous fix of 6.8688.
Friday's fixing was the weakest since Dec. 27, 2018.
    In the spot market, onshore yuan opened at 6.9000
per dollar, fell to a low of 6.9099 at one point, the softest
level since Dec. 24, 2018.
    At midday, spot yuan was changing hands at 6.9068, 228 pips
weaker than the previous late session close and 0.30 percent
softer than the midpoint.
    If the yuan finishes late night trade at the midday level,
it would have lost 1.3 percent to the dollar for the week, the
biggest weekly loss since July 2018.
    But losses in the onshore yuan were capped as several
traders said investors were unwilling to test fresh lows below
6.9 per dollar - a level the market widely believes the
authorities will guard to prevent it from sinking further.
    "The market does not dare to buy a lot of dollars, as
investors are worried that the central bank could step in any
time soon," said a trader at a Chinese bank.
    Philip Wee, FX strategist at DBS, said the yuan was likely
to be capped at 7 per dollar ahead of a possible meeting between
President Trump and his Chinese counterpart Xi Jinping at the
G20 summit in late June.
    "Assuming the Xi-Trump meeting takes place next month, no
one expects a trade deal, if any, to roll back existing tariffs
but to hold off Trump's threat to hit a 25 percent tariff on the
remaining $325 billion of Chinese goods," he said in a note on
Friday.
     The offshore yuan weakened to 6.9420 in morning
trade, erasing all the gains made since the previous Trump-Xi
meeting in November. It traded at 6.94 per dollar as of midday. 
    
    The yuan market at 0412 GMT: 
    
    ONSHORE SPOT:
 Item               Current  Previous  Change
 PBOC midpoint      6.8859   6.8688    -0.25%
                                       
 Spot yuan          6.9068   6.884     -0.33%
                                       
 Divergence from    0.30%              
 midpoint*                             
 Spot change YTD                       -0.49%
 Spot change since 2005                19.83%
 revaluation                           
 
    Key indexes:
     
 Item            Current     Previous  Change
                                       
 Thomson         93.65       93.81     -0.2
 Reuters/HKEX                          
 CNH index                             
 Dollar index    97.815      97.855    0.0
    
*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    6.94      -0.48%
        *                        
 Offshore              6.9778    -1.32%
 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 Winni Zhou and John Ruwitch
Editing by Jacqueline Wong)
  
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