Yuan slumps on Sino-US tensions

The yuan eased to a near nine-month low against the US dollar on Wednesday, hit by rising Sino-US tensions following China's proposed security law for Hong Kong, and corporate dollar demand.

Friction between the world's two largest economies worsened after US President Donald Trump said on Tuesday he was preparing a response to China's planned national security legislation for Hong Kong.

"The main source of the pressure seems to have been a deterioration in US-China relations, as well as concerns about the future of Hong Kong more recently," Capital Economics said in a note.

"And once again, the currency would arguably have fallen by even more than it has were it not for the People's Bank of China (PBOC) gently working against the move."

Prior to the market opening, the PBOC set the midpoint rate at 7.1092 per US dollar - 201 pips, or 0.28 per cent, firmer than the previous fix of 7.1293.

Several traders and analysts said Wednesday's fixing came in much stronger than their forecasts and could signal that the authorities are uncomfortable with recent yuan weakness.

Wednesday's midpoint rate was 128 pips firmer than Reuters' estimate of 7.1220 per US dollar.

The official guidance rate was fixed at its lowest levels since the 2008 global financial crisis on Monday and Tuesday. But Wednesday's midpoint failed to lift the yuan.

Onshore yuan opened at 7.1330 per US dollar and fell to a low of 7.1595 at one point - the weakest since September 4, 2019. By midday, spot yuan was changing hands at 7.1549 - 189 pips softer than the previous late session close.

"Unless (the central bank) goes rogue with its fixing, the market will not care too much about the midpoint for now," said a trader at a Chinese bank.

"Instead, current Sino-US relations and rising dollar demand due to dividend payments are pressuring the yuan."

Chinese companies listed in Hong Kong usually have higher demand for dollars ahead of dividend payments to overseas shareholders.

Another trader at a Chinese bank said rising corporate demand for dividend payments could suggest corporate clients expect more yuan weakness and wish to lock in requirements.

The offshore yuan was trading at 7.1671 per US dollar as of midday.

Reuters