Yuan weakens as renewed virus fears buoy US dollar

[SHANGHAI] China's yuan weakened against the US dollar on Wednesday as renewed global concern about a new wave of coronavirus cases and strong US housing data lifted the greenback.

A softer central bank fixing also weighed on the yuan. The People's Bank of China set the midpoint rate for its daily trading band at 6.7986 per US dollar prior to market open, its weakest fixing in a week.

Spot yuan opened at 6.7920 per dollar and was changing hands at 6.7959 at midday, 141 pips weaker than Tuesday's late session close.

The currency has softened since touching 6.7501 to the dollar on Sept 17, its strongest level since late April 2019.

Nevertheless, a trader at a foreign bank said factors continue to support a firmer yuan.

"It's hard to say where the bottom is for USD/CNY. Recently there's been a risk of retracement. But if you look at the basket, the yuan is still rising," said a trader at a foreign bank.

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The Thomson Reuters/HKEX Global CNY index, which tracks the onshore yuan against a basket of currencies on a daily basis, touched a high of 93.99 on Wednesday, near a more than five-month high touched on Sept 17.

The dollar strengthened on Wednesday, supported by data that showed US home sales surged to their highest level in nearly 14 years in August, despite a warning by a prominent Federal Reserve official of the risk of a long, slow recovery if the US Congress fails to pass additional stimulus.

A second wave of coronavirus infections in Europe and Britain also boosted the global dollar index, which rose to 94.19 from the previous close of 93.975.

Despite the yuan's weakness on Wednesday, UBS Wealth Management's chief investment office said that it had recently raised its year-end forecast for the yuan to 6.7 per dollar from 6.8, based on better-than-expected Chinese economic data, expectations of improving consumption and a largely stable dollar index.

"Although the yuan is biased toward strengthening before the end of the year, the exchange rate is likely to oscillate between 6.65 and 6.95 in the next three months due to the US election and the possibility of continued tensions between China and the US," UBS said.

Morgan Stanley has hiked the chance of China being added to one of the world's top government bond indexes later this week to 90 per cent after the country made some additional improvements to its market practices.

The actual inclusion in the World Government Bond Index (WGBI) will happen in September 2021 with a 20-month phase-in.

Morgan Stanley estimates it could help funnel US$60 billion to US$90 billion of investment money into China in the next few years and US$3 trillion over the next decade.

REUTERS