HONG KONG (March 2): China's yuan fell to its lowest level against the dollar since October 2012 and to within a hair's breadth of the lower limit of its daily trading range on Monday after the central bank cut its benchmark interest rate during the weekend.
Traders expect the Chinese currency to fall further in the coming months due to a sluggish economy, as the central bank is exected to ease monetary policy further as inflation remains lows.
"The concern over the lower headline inflation profile amidst high real interest rate is precisely one of the reasons why we think the CNY may need to weaken further," said Heng Koon How, a senior currency strategist atCredit Suisse's Private Banking and Wealth Management department in Singapore.
The People's Bank of China set the midpoint at 6.1513 per dollar prior to market open, weaker than the previous fix 6.1475. It was the weakest level since Nov 6, 2014.
The spot market opened at 6.2730 per dollar, 34 pips weaker than the previous close and 1.98 percent weaker than the midpoint. The yuan traded in a very tight range between 6.2733 and 6.2727 in morning trade.
The spot rate is currently allowed to trade with a range 2 percent above or below the official fixing on any given day.
The PBOC is unlikely to signal an outright depreciation of the yuan, but may guide the daily fixing rate gradually lower, Heng said.
The offshore yuan was trading 0.27 percent weaker than the onshore spot at 6.29 per dollar.
Offshore one-year non-deliverable forwards contracts (NDFs), considered the best available proxy for forward-looking market expectations of the yuan's value, traded at 6.4185, or 4.16 percent weaker than the midpoint.
One-year NDFs are settled against the midpoint, not the spot rate, and now that the trading band has been widened to 2 percent in either direction, corporates are much warier of using the NDF to hedge.
As a result the market has lost liquidity in recent years and has frequently proven an unreliable measure of market sentiment.
original source: http://www.theedgemarkets.com/my/article/chinas-yuan-falls-lowest-2012-after-cbank-rate-cut