The People's Bank of China (PBOC) had set the midpoint of the yuan's daily trading band within a narrow, 10-pip range for nearly a month beginning in mid-September, but surprised market players with a weaker fixing on Wednesday.
The bank set the midpoint rate
That helped to push the yuan down against the dollar on the spot market, but a trader at a Chinese bank in Shanghai said it sent little "clear policy guidance" to the market.
"The spot yuan is likely to continue consolidating in the near term," he said.
On Thursday, spot yuan opened at at 7.0975 per dollar and was changing hands at 7.0981 at midday, 31 pips away from the previous late session close. The currency breached the 7.1-per-dollar level for a second straight day earlier in the morning session.
"A weakening in the CNY fixing, coupled with Chinese threats of 'countermeasures' against the U.S. for passing the Hong Kong Human Rights and Democracy Act in the House, have weighed on Asian FX sentiment," analysts at DBS said in a note.
Traders also said that unease over the political situation in Hong Kong continued to depress sentiment.
The U.S. House of Representatives passed legislation on Tuesday that would toughen scrutiny on China's rule in Hong Kong, even as the Senate considers similar legislation. A Chinese foreign ministry spokeseman said on Wednesday that China "must take effective measures to firmly safeguard its sovereignty, security, and development interests."
Adding to uncertainty, U.S. Treasury Secretary Steven Mnuchin said that U.S. and Chinese negotiators were working on finalising a Phase 1 trade deal for the Chinese and U.S. presidents to sign next month, but said that here were no plans for another high-level meeting on the trade deal outlined last week.
The offshore yuan barely budged, weakening to 7.1020 per dollar from Wednesday's close of 7.1014.
Offshore one-year non-deliverable forwards contracts (NDFs)
(Reporting by Andrew Galbraith and Winni Zhou; Editing by Simon Cameron-Moore)
