SHANGHAI, May 31: China’s yuan closed down slightly against the dollar on Friday despite the central bank setting a record-high midpoint, and traders said the end of a massive rally in the currency’s value against the dollar may be in sight.
The PBOC set the yuan’s midpoint at a record high 6.1796 against the dollar, slightly stronger than Thursday’s fixing of 6.1820.
But spot yuan closed at 6.1345 per dollar, down from 6.1309 at Thursday’s close.
The yuan, which is allowed to rise or fall 1 percent in a day from the central bank’s midpoint, usually follows the direction of the base rate, and has closely hugged the strong side of the trading band since October.
Traders said the market interpreted Friday’s strong midpoint as a political goodwill gesture before Chinese President Xi Jinping visits the United States on June 7-8.
A study of moves in the yuan prior to diplomatic events by Louis Kuijs and Tiffany Qiu of RBS showed that the yuan tends to appreciate strongly in the weeks prior to state visits by Chinese leaders to the United States or vice versa, appreciating by an average 47.9 pips.
‘Most of us believe the yuan may have peaked for now, partly as dollar sales in the market appear to be easing in recent days,’ said a trader at a European bank in Shanghai.
Chinese firms have been borrowing dollars to purchase yuan, which economists have said is unsustainable, in the hopes that it will continue to appreciate.
Hot money has also been flowing into the market to take advantage of appreciation, which has begun to distort China’s trade statistics.
The onshore spot yuan market at a glance:
Item Current Previous Change (pct)
PBOC midpoint 6.1796 6.1820 +0.04%
Spot yuan 6.1345 6.1309 -0.06%
Divergence from midpoint* -0.73%
(pct)
Spot change ytd +1.56%
Spot change since 2005 revaluation +34.92%
*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.
OFFSHORE CNH MARKET
Offshore spot yuan traded in Hong Kong reversed its recent trend and began pricing at a discount against the onshore spot yuan on Thursday, indicating that the offshore market is also growing skeptical that the onshore rally will continue.
The discount widened to 0.15 percent on Friday from 0.07 percent late on Thursday.
The offshore yuan market at a glance:
Instrument Current Difference from onshore
Offshore spot yuan 6.1470 -0.20%
Offshore non-deliverable 6.2620 -1.32%
Forwards
*Premium for offshore spot over onshore **Figure reflects difference from PBOC’s official midpoint, since non-deliverable forwards are settled against the midpoint.
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