China's yuan looks to end week little changed as cbank seeks to calm markets

HONG KONG - China's yuan was broadly unchanged on Friday and looked to close out the week on a flat note as the central bank sought to stabilise the currency and calm financial markets after its shock devaluation last week.

Still, many market watchers expect authorities will allow it to weaken further this year, as the economy shows fresh signs of weakening.

Strategists at ANZ joined their counterparts in Goldman Sachs and Morgan Stanley this week in revising forecasts for the yuan lower by the end of the year.

Bearish bets on the Chinese yuan hit their largest in more than five years while the outlook on emerging Asian currencies in the past two weeks deteriorated to its worst in years, a Reuters poll showed this week.

The People's Bank of China set the midpoint rate at 6.3864 per dollar prior to market open, firmer than the previous fix of 6.3915.

Spot yuan hardly budged in early deals at 6.3904 per dollar, less than a percentage point away from Thursday's close.

This week's tiny moves in the yuan is thanks to the central bank which has kept the yuan daily fixing broadly stable this week. The currency dropped 3 per cent last week.

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

Sentiment on the yuan had been relatively optimistic since early April this year. But the Aug. 11 devaluation after a run of poor economic data has prompted fears of a "currency war".

Kazkhstan fired the latest currency salvo on Thursday, ditching a trading band on its currency, while Vietnam devalued the dong on Wednesday for the third time this year.

The yuan has lost 2.9 per cent so far this year, but has fared better than some of its emerging market peers such as the Indonesian rupiah and the Malaysian ringgit which have lost 10 and 15 per cent of their value.

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 6.6045 per dollar, below last's week high of 6.68.

In the Hong Kong market, the basis spread between the offshore and onshore yuan tightened further after last week's blowout, indicating market sentiment was returning to normal.

Implied currency volatility in offshore yuan has declined from record highs hit last week, though it remains at elevated levels as traders have begun to price in greater expected price swings in the yuan.