The Chinese yuan briefly fell to four-month low in the offshore market on Wednesday as a deepening stock market rout prompted investors to cut their long positions in the Chinese currency, though a broadly stable onshore market helped it recover ground.
Concerns that a broader equity market rout would spread to other asset classes such ascurrencies and bonds spurred some hedge funds who had bought the Chinese yuan in the spot and the forward markets to cut their positions.
"The street has been broadly long CNH and some of those positions are being squared," said the head of currency trading at a U.S. bank in Hong Kong.
Falling for the fourth straight session, the offshore yuan CNH=D3 touched its weakest level since March 18, changing hands at 6.2188 per dollar by midday, before steadying at the end of the day.
In the onshore market, the spot yuan ended at 6.2094 per dollar, barely changed from the previous close of 6.21.
Traders said the onshore yuan was unlikely to break 6.21 per dollar level as China's central bank has showed its determination to maintain the currency stable for now.
The People's Bank of China (PBOC) set the midpoint rate CNY=SAEC at 6.1175 per dollar prior to market open, 0.01 percent weaker than the previous fix at 6.1166.
As stock markets plunged more than 7 percent at the opening bell, both offshore yuandeliverable and non-deliverable forwards fell sharply reflecting the stress in the currency market. Key stock indexes ended 5-7 percent lower.
Traders also reported hectic trading in the options market as a pick up in volatility and the stock market rout encouraged a rise in demand for yuan puts.
The stock market slump has likely increased the risks of a financial crisis in Chinaconsiderably and also brought forward the timeline of a crisis, Bank of America Merrill Lynch said in a research note.
original source: http://www.reuters.com/article/2015/07/08/us-markets-china-yuan-midday-idUSKCN0PI12Z20150708