Huawei Chief Financial Officer Meng Wanzhou is fighting to be released on bail after she was arrested on Dec. 1 in Vancouver at the request of the United States. She is also fighting the extradition request, and China has protested her arrest to U.S. and Canadian officials.
The arrest could drive a wedge between the world's two economic powerhouses just days after President Donald Trump and President Xi Jinping agreed to a temporary truce in their trade war.
Markets believe the yuan will be influenced by Sino-U.S. developments and continue to be sensitive to news headlines.
"Developments in the Meng Wanzhou incident will dominate the yuan's movements in the short term," Stephen Chiu, FX and rates strategist at China Construction Bank (Asia) in Hong Kong, said in a note.
Separately, U.S. Trade Representative Robert Lighthizer said on Sunday that U.S.-China trade negotiations need to reach a successful end by March 1 or new tariffs will be imposed, clarifying there is a "hard deadline" after a week of seeming confusion among President Trump and his advisers.
"Although there were no reports on discussions about RMB exchange rate during the Xi-Trump meeting, we believe a mutual understanding on the issue is likely an important part of any trade deal," Wang Tao, head of China economic research at UBS in Hong Kong, said in a note on Monday.
"As trade negotiations continue, we believe the Chinese authorities will maintain its tight management of USD/CNY and keep it more stable than it would otherwise would have been."
Prior to market opening on Monday, the People's Bank of China (PBOC) set the midpoint rate
In the spot market, onshore yuan
Weakness in the dollar index in global markets should have supported the local currency, but there was buying interest in the greenback on Monday morning, said a trader at a Chinese bank in Shanghai.
In overseas markets, the dollar <.DXY> slid after soft U.S. payrolls data fuelled speculation that the Federal Reserve may stop raising interest rates after a highly likely move next week. [FRX/]
Several yuan traders saw major state-owned banks in both onshore and offshore markets offering dollars on Friday, in a bid to prevent the Chinese currency from sinking too fast, but they did not see such flows on Monday morning.
State banks usually trade on behalf of the PBOC in foreign exchange markets, but some argue that these big banks could also trade for their proprietary accounts.
Spot yuan on Monday was also pressured by downbeat trade and inflation data released over the weekend.
November exports and imports were weaker than expected, showing slower global and domestic demand, while factory prices for the month rose at their slowest pace since October 2016, pointing to a slowing economy.
"The softer growth momentum and benign inflationary pressure signal more room for the PBOC's rate cut, and the diverging PBOC-Fed monetary policy stance could continue to weigh on the RMB," said Ken Cheung, senior Asian FX startegist at Mizuho Bank.
The Federal Reserve is widely expected to raise interest rates this month and possibly indicate a trajectory for further tightening expectations.
The offshore yuan was trading at 6.8974 per dollar as of midday.
(Editing by Jacqueline Wong)
By Winni Zhou and Andrew Galbraith
