China’s yuan eases after surprisingly weak fixing, high producer inflation adds to policy anxiety

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    SHANGHAI, Oct 14 (Businesshala) - China's yuan weakened against
the dollar on Thursday after the central bank set the currency's
daily fixing weaker than expected, pulling back from a nearly
four-month high touched a day earlier.
    The official guidance rate has been aligned with market
forecasts recently, so the move prompted some traders to
speculate that authorities have become increasingly
uncomfortable with persistent strength in the yuan as economic
headwinds grow.
    Data on Thursday showed China's producer inflation hit a
record high in September, driven by energy shortages and soaring
commodity prices, piling pressure on businesses.
    That followed official readings on Wednesday showing broader
credit growth has cooled to multi-year lows. 
    But market views differed as to whether the jump in producer
prices would give less room to the central bank for further
policy easing, with some noting consumer inflation so far
remains modest.
    "Factory gate inflation won't stay this high for long,"
Capital Economics said in a note. 
    "Headline consumer price inflation should remain below 2% in
the coming quarters and is unlikely to constrain the PBOC’s
ability to loosen monetary policy."         
    Prior to the market opening, the People's Bank of China
(PBOC) set the yuan's daily midpoint rate at 6.4414
per dollar, 42 pips softer than Businesshala' estimate of 6.4372. 
    In the spot market, the yuan opened at 6.4336 per
dollar and was changing hands at 6.4388 at midday, 103 pips
weaker than the previous late session close. 
    The spot price surged to a high of 6.4260 late on 
Wednesday, the loftiest level since June 17.
    The yuan has gained 1.4% against the dollar so far this
year, but about 5.5% against a basket of currencies of China's
major trading partners.
    While a pause in a dollar rally that had lifted the
greenback to a one-year high initially looked set to buoy the
yuan, traders said that the Chinese unit was near the top of its
recent trading range, prompting dollar buying. 
    But any rebound in the dollar index would drag the yuan
lower, they said.
    "It's really the time to build long dollar positions. I
guess there won't be substantial improvements in Sino-U.S.
relations, so there's a good chance of booking profits by
betting on a rebound in USD/CNY," said a trader at a foreign
bank.    
    The dollar has been supported by growing expectations that
the U.S. Federal Reserve will move more quickly to taper asset
purchases and hike interest rates.
    On Wednesday, the Fed signaled it could start reducing its
crisis-era support for the U.S. economy by the middle of next
month, with a growing number of its policymakers worried that
high inflation could persist longer than previously thought.

    By midday, the global dollar index rose to 94.044
from the previous close of 94.016, while the offshore yuan
 was trading at 6.4378 per dollar. 
    
    The yuan market at 0406 GMT: 
    
    ONSHORE SPOT:
 Item               Current  Previous  Change
 PBOC midpoint      6.4414   6.4612    0.31%
                                       
 Spot yuan          6.4388   6.4285    -0.16%
                                       
 Divergence from    -0.04%             
 midpoint*                             
 Spot change YTD                       1.39%
 Spot change since 2005                28.54%
 revaluation                           
 
    Key indexes:
     
 Item            Current     Previous  Change
                                       
 Thomson         100.09      100.11    0.0
 Businesshala/HKEX                          
 CNH index                             
 Dollar index    94.044      94.016    0.0
 
    
    
*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% from official midpoint rate it sets each
morning.

    OFFSHORE CNH MARKET   
  
 Instrument            Current   Difference
                                 from onshore
 Offshore spot yuan    6.4378    0.02%
        *                        
 Offshore              6.627     -2.80%
 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 Andrew Galbraith and Jindong ZHang; Editing by
Kim Coghill)
  
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