China's yuan weakens as US election jitters heighten volatility
Updates with prices as of 0503 GMT
SHANGHAI, Nov 1 (Reuters) -China's yuan extended losses on Friday, having posted its first monthly decline in four in October, as investors remained anxious ahead of next week's U.S. presidential election and its impact on Sino-U.S. trade.
Uncertainty around the election and looming threats of higher tariffs on Chinese exports prompted many currency traders to hedge against higher turbulence in the yuan in the coming week.
That drove the implied volatility of the one-week dollar/offshore yuan CNHSWO= to a level not seen since August 2015, when China delivered a one-off 2% devaluation that roiled global financial markets.
As of 0503 GMT, the onshore yuan CNY=CFXS traded at 7.1219 to the dollar. It weakened 1.4% against the greenback in October to post the first monthly drop since June and is now down 0.3% year-to-date.
Its offshore counterpart CNH=D3 traded at 7.1292 per dollar.
The yuan's recent about-face comes as investors buy the dollar and sell emerging market currencies, mainly the yuan, in anticipation of Republican candidate Donald Trump making a return to the White House.
Opinion polls show former President Trump is running neck and neck with Vice President Kamala Harris.
As part of his pitch to boost American manufacturing, Trump has promised voters he will impose tariffs of 60% or more on goods from China. Trump's proposed tariff and tax policies are seen as inflationary and therefore likely to keep U.S. interest rates high and undermine trading partners' currencies.
During Trump's first presidency, the yuan weakened about 5% against the dollar during the initial round of U.S. tariffs on Chinese goods in 2018, and fell another 1.5% a year later when trade tensions escalated.
But the yuan's losses were capped after private and official surveys both showed China's manufacturing activity swung back to growth in October as an expansion in new orders led to a pickup in production growth.
Prices of new homes in China also rose at a faster pace in October, traditionally a peak season for house-hunting, a private survey showed on Friday.
"The economy has accelerated on policy supports, allowing policymakers to achieve this year's growth target of 'around 5%,'" said Larry Hu, chief China economist at Macquarie.
"As such, the National People's Congress (NPC) meeting may focus on debt swap rather than new stimulus...The next step of the stimulus will largely be determined by the state of external demand, and the outcome of the U.S. election is a key swing factor."
China's top legislative body will meet from Nov. 4-8, with markets widely expecting the meeting to approve more fiscal stimulus measures.
Sources told Reuters this week that China is considering approving next week the issuance of more than 10 trillion yuan ($1.40 trillion) in extra debt in the next few years to revive its fragile economy, a fiscal package that is expected to be further bolstered if Trump wins the U.S. election.
Prior to the market opening, the People's Bank of China (PBOC) set the midpoint rate CNY=PBOC, around which the yuan is allowed to trade in a 2% band, at 7.1135 per dollar, and 13 pips weaker than a Reuters' estimate CNY=RTRS of 7.1122.
Separately, currency traders said they will monitor U.S. job data due later on Friday for more clues on the health of the world's largest economy, given it could affect Federal Reserve's monetary easing trajectory.
Reporting by Shanghai Newsroom; Editing by Jamie Freed and Sam Holmes
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