SHANGHAI, July 18 (Reuters) - China's yuan eased against the dollar in subdued activity on Thursday, as market sentiment remained fragile over signs of renewed trade tensions with the United States.
With the Chinese economy growing at its weakest pace in 27 years, traders are watching out for any fresh developments in the year-long Sino-U.S. standoff.
While Washington and Beijing agreed to resume negotiations during the G20 summit last month, U.S. President Donald Trump has continued with his threats to slap tariffs on more Chinese goods on top of duties already imposed.
The Wall Street Journal reported that progress toward a U.S.-China trade deal has stalled while the Trump administration determines how to address Beijing's demands that it ease restrictions on Huawei Technologies.
Prior to market opening on Thursday, the People's Bank of China (PBOC) set the midpoint rate at 6.8761 per dollar, 66 pips or 0.1 percent firmer than the previous fix of 6.8827.
In the spot market, onshore yuan opened at 6.8750 per dollar and was changing hands at 6.8769 at midday, 36 pips weaker than the previous late session close.
The onshore spot yuan traded in a very tight range of about 40 pips on Thursday morning, while volume shrunk to $10.42 billion at midday, down from a normal half-day volume of about $15 billion.
Although the spot rate drifted down, traders said market volatility remained low as investors were unwilling to make huge bets for now.
"The market is waiting for the next catalyst," said a trader at a Chinese bank, referring to the trade negotiations and the upcoming Politburo meeting later this month.
The meeting of the Politburo, a top decision-making body of China's ruling Communist Party, is likely to set the policy tone for the rest of the year.
"Despite the U.S. tariffs hike inflicting direct damage on Chinese economy, the PBOC may be lagging behind its central bank peers in the region to resume monetary easing," said Ken Cheung, senior Asian FX strategist at Mizuho Bank in Hong Kong.
While the PBOC has slashed the amount of cash that banks must hold as reserves serveral times since last year, it has refrained from cutting benchmark policy rate, partly on concerns of undermining a broad years-long deleveraging push.
Analysts at Guotai Junan Securities said the widening yield gap between China and the United States, the resumption of the Sino-U.S. trade talks and pressure on the dollar from the U.S. Federal Reserve's rate cut expectations should benefit the yuan.
"With the protection of an over 100 basis points of yield gap between China and the United States, the yuan exchange rate is likely to stay stable," they said in a note on Thursday.
Yuan deals were not affected after the FX regulator published data earlier in the session showing China's commercial banks sold a net $19.3 billion of foreign exchange in June, compared with a net purchase of $6.2 billion in May.
The global dollar index traded at 97.08 at midday from the previous close of 97.223.
The offshore yuan was trading at 6.8779 per dollar as of midday.
The yuan market at 0402 GMT:
ONSHORE SPOT: Item Current Previous Change
PBOC midpoint 6.8761 6.8827 0.10% Spot yuan 6.8769 6.8733 -0.05%
Divergence from 0.01% midpoint*
Spot change YTD -0.06% Spot change since 2005 20.35% revaluation
Key indexes:
Item Current Previous Change Thomson 93.59 93.74 -0.2 Reuters/HKEX
Dollar index 97.08 97.223 -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 6.8779 -0.01%
*
Offshore 6.9129 -0.53%
non-deliverable