China's yuan eases, set for losing week on seasonal dollar demand



SHANGHAI, July 1 (Reuters) - China's yuan eased against the dollar on Friday and looked set for a losing week, as heavier seasonal corporate demand for the greenback offset fears of a U.S. recession and hopes for domestic economic recovery.

Prior to the market opening, the People's Bank of China (PBOC) set the midpoint rate CNY=PBOC at 6.6863 per dollar, 251 pips or 0.38% firmer than the previous fix 6.7114.

In the spot market, onshore yuan CNY=CFXS opened at 6.6954 per dollar and was changing hands at 6.7045 at midday, 44 pips weaker than the previous late session close.

If the yuan retains all the losses by the late night close, it would have lost 0.22% to the dollar for the week.

Analysts and traders said the yuan weakness was largely driven by their corporate clients' dollar demand as many of the overseas-listed Chinese companies have to make dividend payouts to their foreign shareholders between June and August each year.

Marco Sun, chief financial market analyst at MUFG Bank, said such FX demand from corporate clients was at its peak, as "companies usually picked the timing to purchase large amounts of foreign exchange."

But losses in the yuan on Friday were limited as both official and private surveys showed that China's manufacturing activity expanded in June, as the lifting of COVID lockdowns sent factories racing to meet recovering demand.

"The RMB has stabilised over the past few weeks as 'lockdown' measures have eased and the central government is sounding more determined to spur a growth recovery," analysts at HSBC said in a note.

"The next event risk for the RMB will probably arise from the U.S.'s ongoing review of its Section 301 tariffs. A material rollback of tariffs may push USD/RMB lower."

The cabinet was quoted by state media as saying on Thursday that China would issue 300 billion yuan in financial bonds to replenish capital of key projects, or provide bridge financing for projects funded by special bonds.

Separately, market participants will pay close attention to U.S. ISM manufacturing data due later in the session to gauge the health of the world's largest economy, which could affect the pace of U.S. monetary tightening and global currency markets.

By midday, the global dollar index .DXY rose to 104.931 from the previous close of 104.685, while the offshore yuan CNH=D3 was trading 6.7135 per dollar.

The yuan market at 0403 GMT:

ONSHORE SPOT: Item

Current Previous Change PBOC midpoint

6.6863 6.7114

0.38% CNY=SAEC

Spot yuan

6.7045 6.7001

-0.07% CNY=CFXS

Divergence from

0.27%

midpoint*

Spot change YTD

-5.21% Spot change since 2005

23.45% revaluation

Key indexes:

Item

Current

Previous Change

Thomson

102

102.27

-0.3 Reuters/HKEX

CNH index

Dollar index

104.931

104.685 0.2

*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

6.7135

-0.13% CNH= *

Offshore

6.7011

-0.22% non-deliverable

forwards

CNY1YNDFOR= **

*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 Winni Zhou and Brenda Goh; Editing by Kim Coghill

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