HONG KONG, Dec 11: China’s yuan consolidated recent gains against the dollar on Wednesday after the central bank signaled a slower pace of rises for its currency by fixing the yuan’s trading midpoint slightly higher.
The People’s Bank of China (PBOC) appears to have flagged a new round of appreciation for its tightly-managed currency into the closing days of the year after it fixed the daily midpoint at a record high for a fourth consecutive day, though the magnitude of the rise slowed on Wednesday.
While the cumulative change in the yuan’s fix over the last three sessions until Wednesday marked the biggest since early July, suggesting the central bank may have shifted its currency management policy, traders are wary of pushing the currency higher after the recent gains.
By midday, the yuan, also known as the renminbi, weakened slightly to 6.0713, not far away from a record 6.0703 per dollar hit in opening trade on Tuesday. The central bank fixed the yuan’s daily midpoint at 6.11, its highest since a 2005 revaluation.
‘Markets are getting a bit wary on how much steam this rally has and we are seeing some profit taking at these levels,’ said a trader at a European Bank in Hong Kong.
In a further sign that this phase of the yuan’s rise may be drawing to a close, the offshore yuan traded in Hong Kong weakened for a second consecutive day on Wednesday as interbank players cut their short dollar positions.
The sharp gains in the Chinese currency since last Friday has been dictated by heavy capital flows disguised as trade to exploit the widening interest rate differentials prevailing in the Hong Kong and the mainland markets where bond yields have slowly ratcheted higher in the onshore markets.
Over the last two months, the spread between one-year debt in the Hong Kong and onshore markets has nearly doubled to more than 300 basis points, according to Thomson Reuters data.
The combination of the Chinese yuan being the sole bright spot in the Asian foreign exchange markets this year and the PBOC dampening sharp currency moves have prompted companies to exploit the higher yields in the onshore market.
The currency has risen nearly 2.7 percent so far this year and is heading for a 3 percent appreciation for 2013 assuming it lands somewhere around 6.05 per dollar by year-end, tripling a 1-percent rise in 2012 and exceeding traders’ expectations for a 2-percent gain.
The onshore spot yuan market at a glance:
Item Current Previous Change
PBOC midpoint 6.11 6.1114 0.02%
Spot yuan 6.0714 6.071 -0.01%
Divergence from midpoint* -0.63%
Spot change ytd 2.62%
Spot change since 2005 revaluation 36.32%
*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 1 percent from official midpoint rate it sets each morning.
(AGENCIES)
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