Yuan set for 3rd weekly loss in 4, but PBOC seen tempering pace of depreciation

(Updates prices, adds comments and details)

SHANGHAI, Aug 23 (Reuters) - China's yuan recouped early losses on Friday but remained on course for its third weekly loss in four as the United States prepares to impose more tariffs on Chinese goods from next month.

Spot yuan ended the domestic session at 7.0825 per dollar, bouncing from an earlier 11-1/2-year low of 7.0992 and 5 pips firmer than the previous late night close.

If the yuan finishes the late night session at the same level, it would have lost 0.57% to the dollar for the week.

Hopes are fading for a U.S-China trade deal anytime soon, although the Trump administration says it still expects the two sides will hold face-to-face talks in September.

The yuan has now depreciated around 2.6% to the dollar since President Donald Trump said on Aug. 1 he would impose tariffs on another $300 billion of Chinese goods. Days later, China let the yuan slip through the closely watched and long supported 7-per-dollar level, and Washington labelled it a currency manipulator.

However, traders said China's central bank may have signalled an intention to stabilise the currency on Friday through its daily official midpoint setting, after the yuan slid 0.34% on Thursday.

Prior to the market opening, the People's Bank of China (PBOC) lowered the official yuan midpoint to a fresh 11-1/2 year low of 7.0572 per dollar, 82 pips weaker than the previous fix of 7.0490.

Though it was the weakest guidance rate since March 21, 2008, it was stronger than the 7.0674 level market watchers had expected. Traders took that as an official attempt to slow the pace of the yuan's decline.

"The official fixing didn't match our forecast, (the central bank) must have heavily used its counter-cyclical factor," said a trader at a Chinese bank in Shanghai.

China first introduced the unspecified counter-cyclical factor into its midpoint fixing formula in May 2017 in what traders believed was a move to reduce price swings and counteract expectations of further yuan depreciation.

The central bank was believed to have heavily used the X factor earlier this month as authorities sought to slow the currency's decline after letting it breach the key 7 level on Aug. 5.

"Chinese shares and major currencies don't seem to be worried about this. So far, it looks like the PBOC has been able to keep the yuan's moves under control," said Ayako Sera, senior market strategist at Sumitomo Mitsui Trust Bank.

Many market participants said they consider 7.1 as China's floor for the onshore yuan for now, although the offshore yuan briefly crossed that level on Friday morning and weakened to 7.1382 at one point early this month.

Unlike earlier in the week, traders said they had not seen state-controlled banks stepping into the market on Friday.

Major banks were seen receiving dollar liquidity in the forwards market before selling the greenback in the onshore spot market earlier this week, sources told Reuters. And big banks were also seen selling dollars at around 7.07 per dollar on Thursday morning.

Some traders also said investors chose to liquidate their positions ahead of an event-packed weekend. Global markets are awaiting a keynote speech by the head of the U.S. Federal Reserve after some of his fellow policymakers signalled reluctance to cut U.S. interest rates further.

The comments are likely to bring volatility to major currencies.

(Reporting by Winni Zhou and John Ruwitch in SHANGHAI, additional reporting by Tomo Uetake in TOKYO; Editing by Simon Cameron-Moore & Kim Coghill)

2019-08-23 11:16:46

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