Yuan skids to 3-month low as China's economic slowdown bites

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(Adds details, table, updates prices) SHANGHAI, Aug 19 (Reuters) - China's yuan slipped to a three-month low against the dollar on Friday, breaching a key threshold, after the central bank set a much weakened midpoint guidance, with traders expecting further downside due to an economic slowdown. Prior to market opening, the People's Bank of China (PBOC) set the midpoint rate at 6.8065 per dollar, 263 pips or 0.39% softer than the previous fix of 6.7802, the weakest since Sept. 30, 2020. That dragged the spot market past the psychologically important 6.8 per dollar level. The onshore yuan opened at 6.8050 per dollar and fell to a low of 6.8150, the softest level since May 13. It traded at 6.8103 at midday, 233 pips weaker than the previous late session close. A late night close at this level would mean a loss of about 1% to the dollar for the week, its worst weekly performance since mid-May. Its offshore counterpart followed suit to touch a three-month low of 6.8288, before last fetching 6.8250. Currency traders and analysts said a firmer dollar and weaker domestic economic fundamentals both contributed to the yuan's declines. The selling pressure on the yuan has grown since the PBOC surprised markets by cutting two key interest rates earlier this week, traders say. "Due to intensified divergence in monetary policy between China and the United States", U.S. yields were trading at a higher premium over their Chinese peers, piling depreciation pressure on the yuan, analysts at OCBC Wing Hang Bank said in a note. The PBOC is set to take more easing steps, though policy insiders and analysts say it faces limited room to manoeuvre due to worries over rising inflation and capital flight. A Reuters survey forecast the central bank will cut its benchmark lending rates on Monday, underlining the mounting pressure on the economy. "We reiterate the USD/CNY 7.0 forecast for Q1 2023 with the expectation that the PBOC will not cap further upside in USD/CNY when the broad U.S. dollar uptrend resumes in coming weeks," analysts at RBC Capital Markets said in a note. A recent slew of data showed the economy unexpectedly slowed in July, and recent power shortage and hot weather across the country are also adding to the strains on growth. Moreover, a slowdown in the global economy and persistent supply-chain snags have narrowed the policy options for China. The dollar surged to a one-month high earlier in the day as Federal Reserve officials spoke of the need for further rate hikes, and investors reevaluated minutes from the U.S. central bank's July meeting as being more hawkish than originally thought. The yuan market at 0400 GMT: ONSHORE SPOT: Item Current Previous Change PBOC midpoint 6.8065 6.7802 -0.39% Spot yuan 6.8103 6.787 -0.34% Divergence from 0.06% midpoint* Spot change YTD -6.69% Spot change since 2005 21.53% revaluation Key indexes: Item Current Previous Change Thomson 0.0 Reuters/HKEX CNH index Dollar index 107.636 107.484 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 6.825 -0.22% * Offshore 6.7463 0.89% non-deliverable forwards ** *Premium for offshore spot over onshore **Figure reflects difference from PBOC's official midpoint, since non-deliverable forwards are settled against the midpoint. . (Reporting by Winni Zhou and Brenda Goh Editing by Shri Navaratnam)