China raises yuan mid-point most in 15 months, spurs dollar buying

China's central bank raised its daily guidance rate for the yuan by the most in nearly 15 months on August 28, its latest move to put a floor under the currency as a trade war with the United States grinds on.

But the near 0.7 percent jump in the official mid-point fixing sparked more corporate demand for cheaper dollars, capping the yuan's gains in the spot market.

The People's Bank of China (PBOC) confirmed market suspicions on Friday by announcing it had started changing the way it calculates the mid-point earlier in August, a sign authorities are wary of letting the yuan weaken further after a record 10 straight weeks of losses.

But market watchers say the yuan will come under ongoing depreciation pressure as the Sino-US trade battle deepens and China continues to ease policy to support its cooling economy.

Prior to the market opening on August 28, the PBOC lifted its official yuan midpoint to 6.8052 per dollar, 456 pips, or 0.67 percent, firmer than the previous fix of 6.8508 and largely matching market forecasts.

The move in Tuesday's official guidance rate was the biggest one-day strengthening in percentage terms since June 1, 2017.

The guidance rate was 4 pips lower than Reuters' estimate of 6.8048 per dollar.

Market watchers believe the re-introduction of the mysterious "counter-cyclical factor" in the PBOC's calculations is largely aimed at steadying the currency, not turning it around.

"It does not make sense to see a much stronger CNY from both the economic and trade war perspectives. In our view, the CNY's weakness is justified as the economy is still struggling between growth, debt and leveraging," Zhou Hao, analyst at Commerzbank in Singapore said in a note.

Recent easing measures in monetary policy also imply a weaker bias for the currency, he said, and added it would not be in China's interest to engineer a firmer yuan while the trade dispute with the United States drags on.

In the spot market, the onshore yuan opened at 6.8128 per dollar and quickly fell into negative territory. It was changing hands at 6.8192 at midday, 32 pips weaker than the previous late session close and 0.21 percent softer than the midpoint.

Its offshore counterpart was trading at 6.8100 per dollar at midday.

Bargain hunting for cheaper dollars remained strong, traders said, as many saw strong resistance at 6.8 per dollar, which is an important psychological level for the market for now.

Many analysts including Commerzbank's Zhou expect the onshore yuan to finish 2018 at that a level.

"The reinstatement of the 'counter-cyclical factor' has effectively dampened interest in being long dollars. But corporate dollar demand reignited when the dollar softened overnight," said a trader at a Chinese bank, noting the yuan's short-term movements will remain at the mercy of progress in Sino-US trade talks.

The dollar steadied in global markets after falling to a four-week low overnight, after the United States and Mexico agreed to overhaul the North American Free Trade Agreement, boosting optimism for an easing of global trade tensions.

"The PBOC may have dodged a bullet by implementing the 'counter-cyclical factor' at a time of USD weakness, allowing the USD-CNY to slip lower without the additional resistance of broad USD strength. The key level to watch is now 6.8000 handle," Terence Wu, FX strategist at OCBC Bank in Singapore, said in a note.

"At this juncture, a break lower from that level may give RMB (yuan) bulls greater confidence to push the spot levels down further."