Yuan weakens after China 3Q GDP misses expectations

Credit: REUTERS/DADO RUVIC

The yuan weakened on Monday, pulling back from early gains after new data showed China's economy grew at a slightly slower-than-expected pace in the third quarter, but traders and analysts said broader economic trends continued to support the currency.

SHANGHAI, Oct 19 (Reuters) - The yuan weakened on Monday, pulling back from early gains after new data showed China's economy grew at a slightly slower-than-expected pace in the third quarter, but traders and analysts said broader economic trends continued to support the currency.

China's recovery accelerated in the third quarter, but overall gross domestic product growth of 4.9% missed forecasts, highlighting continued challenges facing the world's second-largest economy as it emerges from the coronavirus crisis.

Traders said they saw some dollar buying when the data came in below forecast, but expectations of a stable, strengthening yuan limited the Chinese currency's fall.

"There was some dollar buying front-running the data release, but the data had a small impact on the exchange rate," said a trader at a Chinese bank. "I expect the yuan to continue to trade in a range. There's still support for USDCNY at the March 2019 low."

The People's Bank of China set the midpoint of the yuan's daily trading band CNY=PBOC at 6.701 per dollar on Monday, its firmest level since April 18, 2019, after the yuan finished its onshore session at an 18-month peak on Friday.

Spot yuan CNY=CFXS opened at 6.6930 per dollar and strengthened to a top of 6.6857 before the data release. At midday, it was changing hands at 6.7005 per dollar, 15 pips weaker than its late session close on Friday.

The offshore yuan CNH=D3 was little changed at 6.696 per dollar.

Traders and analysts say that the policy gap between China and the rest of the world as its economy recovers would continue to support factors benefitting the yuan, including rising foreign interest in Chinese bonds.

"The likely continuation of prudent monetary policy will likely sustain the fairly significant interest rate differential we see between China and many other parts of the world. And that significant interest rate differential ... is likely to continue to drive inflows into both China government bonds and increasingly into China credits more broadly," said Ben Powell, Asia Pacific chief investment strategist at the BlackRock Investment Institute in Singapore.

Offshore one-year non-deliverable forwards contracts (NDFs)CNY1YNDFOR=, considered the best available proxy for forward-looking market expectations of the yuan's value, traded at 6.8579 on Monday.

The yuan market at 4:09AM GMT:

ONSHORE SPOT:

Item

Current

Previous

Change

PBOC midpoint CNY=SAEC

6.701

6.7332

0.48%

Spot yuan CNY=CFXS

6.7005

6.699

-0.02%

Divergence from midpoint*

-0.01%

Spot change YTD

3.92%

Spot change since 2005 revaluation

23.52%

Key indexes:

Item

Current

Previous

Change

Thomson Reuters/HKEX CNH index

95.28

95.26

0.0

Dollar index

93.751

93.699

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% from official midpoint rate it sets each morning.

OFFSHORE CNH MARKET

Instrument

Current

Difference from onshore

Offshore spot yuan CNH= *

6.696

0.07%

Offshore non-deliverable forwards CNY1YNDFOR= **

6.8579

-2.29%

*Premium for offshore spot over onshore CNY=CFXS

**Figure reflects difference from PBOC's official midpoint, since non-deliverable forwards are settled against the midpoint. CNY=SAEC.

(Reporting by Andrew Galbraith and Jindong Zhang; Editing by Simon Cameron-Moore)

((Andrew.Galbraith@tr.com; +86 21 2083 0079; Reuters Messaging: andrew.galbraith.thomsonreuters.com@reuters.net ; Twitter: https://twitter.com/apgalbraith))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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