Yuan weakness, dollar buying

The yuan is at a 10-year low and yet China's big state-run banks were seen selling it today in size and buying US dollars.

Traders cited by Reuters reported large-scale buying of one-year USD/CNY swaps. So much so that swap points were pushed to -135 points from -109 at the previous close. One way the tactic would make sense is if they turned around and sold the dollars in the spot market to buy the yuan, but traders said there were was no evidence of that.

My guess is that they could be building buffers to fight off any push to 7.00 in USD/CNY.

There's a bit more colour in the story:

Major state-owned Chinese banks were seen swapping yuan for dollars in forwards on Tuesday, but there was no immediate evidence of dollar selling in the spot market as the currency neared a key support level, three traders said.

The operation was mainly conducted in the one-year tenor of dollar/yuan swaps, the traders said.

The swap points for such a contract sunk to as low as -135 points, the lowest level since Sept. 6, down from the previous close of -109 points.

A negative number implies the yuan's anticipated value against the dollar in a year's time was expected to rise.

"Big state banks were pushing down the swap points, forcing others to follow," said one of the traders.

Similar operations by major Chinese banks took place during the summer, with traders saying the action was fueled by easing monetary policy.

On Tuesday, traders said there was no immediate evidence that the banks were selling the dollars they acquired via swaps in the spot market. Such a maneuver would support the value of spot yuan against the dollar.

Two traders said they suspected the state-run banks were stockpiling dollars for future use.

China's biggest state-owned banks are widely believed to often act on behalf of the People's Bank of China in the foreign exchange market.

The yuan is trading at its weakest level in over a decade in the onshore spot market, stirring speculation over whether the central bank will tolerate a slide beyond the closely watched level of 7 per dollar, which could risk a sharp increase in capital outflows from the already cooling economy.