SHANGHAI, Feb 13: China’s yuan firmed on Friday, reflecting a broadly weaker U.S. dollar, but trading was thin ahead of the Lunar New Year holiday starting on Feb.18. The People’s Bank of China set the midpoint rate at 6.1288 per dollar prior to market open, firmer than the previous fix 6.1333.
The spot yuan opened at 6.2445 per dollar and was changing hands at 6.2410 at midday, 44 pips stronger than the previous close and 1.83 percent away from the midpoint. The spot rate is currently allowed to trade with a range 2 percent above or below the official fixing on any given day. The yuan’s gains on Friday came as the U.S dollar traded 0.16 percent lower than Thursday’s close against a basket of major currencies at midday in Asia.
The Chinese currency has largely shrugged disappointing domestic economic data released earlier this week, including inflation data on Tuesday that showed producer prices falling at their fastest rate in five years in January and a big fall in year-on-year January imports.
Daily trading volumes averaged $14.2 billion this week, well below the four week average of $14.8 billion. Traders were skeptical that the yuan would see any big moves until after the new year holiday, particularly since the full effect of the central bank’s cut in banks’ reserve ratio requirement in the first week of February had yet to fully filter into the markets.
Nonetheless, China’s slowing economy and deepening concerns about deflationary pressures worldwide have added to speculation that the central bank might guide the currency lower this year. Following a major weakening trend since November 2014, the yuan this year has mostly traded in a tight range. The offshore yuan was trading 0.06 percent weaker from the onshore spot at 6.245 per dollar.
Offshore one-year non-deliverable forwards contracts (NDFs), considered the best available proxy for forward-looking market expectations of the yuan’s value, traded at 6.36, 3.64 percent weaker from the midpoint.
One-year NDFs are settled against the midpoint, not the spot rate, and now that the trading band has been widened to 2 percent in either direction, corporates are much warier of using the NDF to hedge given the basis risk inherent in them. As a result the market has lost liquidity in recent years and has frequently proven an unreliable measure of market sentiment. (AGENCIES)
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