China's yuan falls after weak factory sector survey

HONG KONG - China's yuan edged down against the dollar on Monday after a private survey showed activity at the country's factories shrank at the fastest rate in a year.

The HSBC/Markit Purchasing Managers' Index (PMI) fell to 48.9 in April - the lowest level since April 2014 - from 49.6 in March, as demand faltered and deflationary pressures persisted.

Spot market trade in the yuan opened at 6.2078 per dollar and it was changing hands at 6.2079 at midday, 51 pips weaker than the previous close and 1.49 weaker than the midpoint.

The People's Bank of China set the midpoint rate at 6.1165 per dollar prior to market open, weaker than the previous fix of 6.1137.

The spot rate is allowed to trade with a range 2 per cent above or below the official fixing on any given day.

Market participants are expecting more stimulas measures to shore up China's sluggish economy. UBS expected an interest rate cut in the second quarter and at least another 100 basis points cut in banks' reserve requirement ratios (RRR) this year.

The offshore yuan was trading 0.11 per cent weaker than the onshore spot at 6.2149 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 6.2795, or 2.60 per cent 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 per cent in either direction, corporates are much warier of using the NDF to hedge given the basis risk inherent in them.

As a result the market has lost liquidity in recent years and has frequently proven an unreliable measure of market sentiment.