Yuan falls to 8-year low as China-critic Trump prepares to take office

By Michelle Chen

HONG KONG (Reuters) - China's yuan weakened to an eight-year low on Wednesday as expectations of higher U.S. interest rates buoyed the dollar, putting Beijing's commitment to market-oriented reforms in the spotlight as fierce critic Donald Trump prepares to take office.

The yuan has now depreciated 5.4 percent against the dollar so far this year, with its descent gathering speed since Trump's election in the presidential race on Nov. 8, which has boosted the greenback against most other global currencies.

Trump has threatened to label China a currency manipulator on his first day in office and has threatened to slap punitive tariffs on Chinese imports.

Prior to the market open, the People's Bank of China set a weaker midpoint for the ninth consecutive day as the dollar stood near an 11-month high against a basket of currencies.

The PBOC set the midpoint at 6.8592 per dollar, weaker than the previous fix of 6.8495.

In the spot market, the yuan opened at 6.8608 per dollar and was changing hands at 6.8700 at midday, 135 pips away from the previous late session close and 0.16 percent away from the midpoint.

"We are still waiting for clearer signs of whether the dollar index can stand still above 100 and whether China's central bank will take action to intervene in the market," said a trader at a Chinese bank in Shanghai.

"Our strategy now is to keep our positions low to minimize risk," the trader said.

The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 94.89, weaker than the previous day's 95.01.

The global dollar index fell to 100.08 from the previous close of 100.23.

The offshore yuan was trading 0.16 percent weaker than the onshore spot at 6.8807 per dollar.

"China's authorities may have scaled back intervention given the broad-based nature of the dollar gains, a desire to conserve FX reserves and a new focus on effective exchange rate stability (against a basket of currencies rather than against the dollar)," Standard Chartered analysts said in a report on Wednesday.

A more substantial effort to contain yuan volatility may only emerge if spot approaches 7 per dollar before year-end, the bank said.

Stanchart said it has lowered its forecast for the yuan to 6.9 by end-2016 and 7.06 by end-2017, from 6.75 and 6.78, respectively.

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 7.0615, 2.86 percent away from the midpoint.

One-year NDFs are settled against the midpoint, not the spot rate.

The yuan market at 0729 GMT:

ONSHORE SPOT:

Item Current Previous Change

PBOC midpoint 6.8592 6.8495 -0.14%

Spot yuan 6.87 6.8565 -0.20%

Divergence from 0.16%

midpoint*

Spot change YTD -5.48%

Spot change since 2005 20.47%

revaluation

Key indexes:

Item Current Previous Change

Thomson 94.89 95.01 -0.1

Reuters/HKEX

CNH index

Dollar index 100.08 100.23 -0.2

*Divergence of the dollar/yuan exchange rate. Negative number indicates that spot yuan is trading stronger than the midpoint. The People's Bank of China (PBOC) allows the exchange rate to rise or fall 2 percent from official midpoint rate it sets each morning.

OFFSHORE CNH MARKET

Instrument Current Difference

from onshore

Offshore spot yuan * 6.8807 -0.16%

Offshore 7.0615 -2.86%

non-deliverable

forwards **

*Premium for offshore spot over onshore

**Figure reflects difference from PBOC's official midpoint, since non-deliverable forwards are settled against the midpoint..

(Reporting by Michelle Chen; Editing by Kim Coghill)