HONG KONG, Sept 19 (Reuters) - The yuan fell to its weakest level in a week on Thursday after the U.S. Federal Reserve refrained from promising more interest rate cuts beyond its freshly-made one, prompting markets to bet on a stronger dollar.
The Fed, as anticipated, trimmed rates for a second time this year to fend off risks from a global economic slowdown and trade tensions.
But three of the 10 U.S. central bank policymakers voted against the move and Chair Jerome Powell described U.S. prospects as "favourable" and the rate move as "insurance." The Fed signalled a holding pattern on rates for now.
The dollar responded with a rally overnight, strengthening against most Asian currencies.
The onshore yuan traded down 0.2% at 7.1025 per dollar at midday, its weakest level since Sept. 12. The offshore yuan was off by 0.26% at 7.1025, also its weakest in a week. "The renminbi's fall today has to do with the 'hawkish cut' at the Fed," said a Shanghai-based trader with a foreign bank, who sees the yuan falling further after breaching the 7.1 level.
But a second trader in Shanghai said China's central bank guidance rate has "limited the market's depreciation expectation," adding that Beijing's "intention to stabilise the exchange rate is clear."
The People's Bank of China had set Thursday's midpoint rate at 7.0732 per dollar prior to market open, only slightly softer than the previous fix of 7.0728. The onshore yuan can trade 2% either side of this level.
Traders now turn their attention to the central bank's Loan Prime Rate (LPR) decision on Friday. China reformed the interest rate last month to steer funding costs lower for businesses. The one-year tenor stands at 4.25%
In a note on Thursday, Citic Securities said there is room to move the rate much closer to banks' medium-term facility (MLF) one-year rate, which the PBOC left this week at 3.3% this week.
Ken Cheung, chief Asian FX strategist for Mizuho, said in a note on Thursday that with the Fed's decision, it is "not urgent for the PBOC to deliver a competitive easing package for now". He said the LPR fixing on Friday is expected to fall "modestly" by 5 basis points to 4.20%.
The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 91.59, weaker than the previous day's 91.67.
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 7.1663, 1.30 percent weaker than the midpoint.
One-year NDFs are settled against the midpoint, not the spot rate.
The yuan market at 4:00AM GMT:
ONSHORE SPOT: Item Current Previous Change
PBOC midpoint 7.0732 7.0728 -0.01% Spot yuan 7.1025 7.087 -0.22%
Divergence from 0.41% midpoint*
Spot change YTD -3.23% Spot change since 2005 16.53% revaluation
Key indexes:
Item Current Previous Change Thomson 91.59 91.67 -0.1 Reuters/HKEX
Dollar index 98.474 98.561 -0.1 *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 7.1025 0.00%
*
Offshore 7.1663 -1.30%
non-deliverable