China’s yuan eases after surprisingly weak fixing, high producer inflation adds to policy anxiety

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SHANGHAI — China’s yuan weakened against

the dollar on Thursday after the central bank set the currency’s

daily fixing weaker than expected, pulling back from a nearly

four-month high touched a day earlier.

The official guidance rate has been aligned with market

forecasts recently, so the move prompted some traders to

speculate that authorities have become increasingly

uncomfortable with persistent strength in the yuan as economic

headwinds grow.

Data on Thursday showed China’s producer inflation hit a

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record high in September, driven by energy shortages and soaring

commodity prices, piling pressure on businesses.

That followed official readings on Wednesday showing broader

credit growth has cooled to multi-year lows.

But market views differed as to whether the jump in producer

prices would give less room to the central bank for further

policy easing, with some noting consumer inflation so far

remains modest.

“Factory gate inflation won’t stay this high for long,”

Capital Economics said in a note.

“Headline consumer price inflation should remain below 2% in

the coming quarters and is unlikely to constrain the PBOC’s

ability to loosen monetary policy.”

Prior to the market opening, the People’s Bank of China

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(PBOC) set the yuan’s daily midpoint rate at 6.4414

per dollar, 42 pips softer than Reuters’ estimate of 6.4372.

In the spot market, the yuan opened at 6.4336 per

dollar and was changing hands at 6.4388 at midday, 103 pips

weaker than the previous late session close.

The spot price surged to a high of 6.4260 late on

Wednesday, the loftiest level since June 17.

The yuan has gained 1.4% against the dollar so far this

year, but about 5.5% against a basket of currencies of China’s

major trading partners.

While a pause in a dollar rally that had lifted the

greenback to a one-year high initially looked set to buoy the

yuan, traders said that the Chinese unit was near the top of its

recent trading range, prompting dollar buying.

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But any rebound in the dollar index would drag the yuan

lower, they said.

“It’s really the time to build long dollar positions. I

guess there won’t be substantial improvements in Sino-U.S.

relations, so there’s a good chance of booking profits by

betting on a rebound in USD/CNY,” said a trader at a foreign

bank.

The dollar has been supported by growing expectations that

the U.S. Federal Reserve will move more quickly to taper asset

purchases and hike interest rates.

On Wednesday, the Fed signaled it could start reducing its

crisis-era support for the U.S. economy by the middle of next

month, with a growing number of its policymakers worried that

high inflation could persist longer than previously thought.

By midday, the global dollar index rose to 94.044

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from the previous close of 94.016, while the offshore yuan

was trading at 6.4378 per dollar.

The yuan market at 0406 GMT:

ONSHORE SPOT:

Item Current Previous Change

PBOC midpoint 6.4414 6.4612 0.31%

Spot yuan 6.4388 6.4285 -0.16%

Divergence from -0.04%

midpoint*

Spot change YTD 1.39%

Spot change since 2005 28.54%

revaluation

Key indexes:

Item Current Previous Change

Thomson 100.09 100.11 0.0

Reuters/HKEX

CNH index

Dollar index 94.044 94.016 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% from official midpoint rate it sets each

morning.

OFFSHORE CNH MARKET

Instrument Current Difference

from onshore

Offshore spot yuan 6.4378 0.02%

*

Offshore 6.627 -2.80%

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 Andrew Galbraith and Jindong ZHang; Editing by

Kim Coghill)

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