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Yuan ends lower after lowest midpoint for year.

Summary: SHANGHAI - The yuan closed slightly lower against t he dollar on Friday after the central bank set the reference rate at its lowest level in 2012, and may come under further pressure following poor Chinese economic data, currency traders said.

SHANGHAI - The yuan closed slightly lower against t he dollar on Friday after the central bank set the reference rate at its lowest level in 2012, and may come under further pressure following poor Chinese economic data, currency traders said.

Customs figures showed July exports from the world's second-largest economy rose just 1 percent from a year earlier, a huge pullpack from the 11 percent growth posted in June. Exports to Europe shrank by over 16 percent in July while export growth to the U.S. flattened.

The People's Bank of China (PBOC) set the official midpoint at 6.3447 against the dollar, the weakest the fix has been set against the dollar since November 2011.

Spot yuan weakened slightly to end at 6.3600 from Thursday's close of 6.3590, but the spread between the spot and the fix continued to narrow as it has since late July.

Dariusz Kowalczyk, forex strategist at Credit Agricole CIB, said while the trade data does not mean China is headed for a hard landing, it will put depreciative pressure on the yuan, in part because it makes additional monetary stimulus from Beijing more likely.

Traders and economists told Reuters that in the past the central bank had begun intervening to prevent the yuan from sliding too quickly against the dollar, given its rise against the euro in global markets.

As a result, the spot market began systematically trading in a range weaker than the midpoint in March as the central bank used the midpoint to brake the slide.

However, the inability of European governments to generate confidence and wishy-washy economic data from the U.S. has clearly taken a toll on trade, and Chinese regulators are now signalling they will tolerate a greater degree of depreciation by setting weaker midpoints, traders said.

This has effectively caused the midpoint to close in on the spot price as regulators let it sink closer to where traders are actually buying and selling it.

A trader at a foreign bank in Shanghai said that traders are paying more attention to external developments than the trade figures.

"Volatility and volumes have been extremely low. The market is watching developments in the U.S. and Europe," she said.

The yuan has fallen 1 percent so far this year and traders now believe the currency could depreciate by an additional 1 percent by the end of this year.

Forward markets reflect these heightened expectations of depreciation as well. Offshore one-year non-deliverable forwards contracts were pricing at 6.4280 i n la te afternoon tr ade. Ons hore forwards of the same tenor changed hands at 6.46 72.

Offshore spot yuan (CNH) has also stayed slightly weaker than the onshore version this week, trading at 6 .36 75.

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Publication:Khaleej Times (Dubai, United Arab Emirates)
Date:Aug 10, 2012
Words:515
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