SHANGHAI, Oct 16: The yuan edged up on Tuesday in light trading after three straight days of successive record highs, as traders said clients grew cautious as the currency approached 6.25 per dollar.
Before trade began, the central bank set the yuan’s midpoint slightly firmer as market players began to take long positions on the dollar following the yuan’s recent strength.
The People’s Bank of China (PBOC) once again set a higher midpoint despite an overnight strengthening in the dollar index. Spot yuan stood at 6.2650 in early afternoon trade, up from a close of 6.2707 on Monday.
Market participants say the PBOC usually sets the midpoint in inverse relation to moves in the dollar index – although some dealers told Reuters the central bank was moving toward referencing it against the previous day’s close of the yuan, not the dollar index, when setting the next day’s midpoint.
Some economists argue that the anomalous midpoint settings are due to Beijing’s desire to neutralise the yuan exchange rate’s utility as a debate weapon during the American presidential campaign.
Critics assert the currency’s value is routinely manipulated by Beijing to support Chinese exports, and Republican presidential candidate Mitt Romney has pledged to label China a currency manipulator – which would automatically trigger economic sanctions – on his first day in office.
However, traders are divided on whether the Chinese government’s attitude toward the U.S. Election is actually driving the spot market. Spot yuan prices have been stronger than the midpoint since mid-September, so if the midpoint is ‘guiding’ spot prices higher, it is doing so from below.
‘I don’t think the U.S. Election has much to do with this,’ said a trader at a foreign bank in Shanghai. He said that positive export figures which exceeded market expectations and the relatively low returns on dollar deposits should get more credit for restoring demand for yuan.
Traders also note that the global forex environment has flip-flopped since the beginning of the year. The Greek debt crisis caused a flight to dollars in the first half of 2012, which caused the yuan to weaken, they said. Then the euro stabilised, and shortly afterward the U.S. Embarked on another round of massive monetary easing, putting downward pressure on the dollar’s value.
The yuan forward market continued the trend of moving closer to the spot price as spreads narrowed.
The onshore one-year forward contract changed hands at 6.4048 on Tuesday, shrinking its spread against the spot price by over two basis points since Oct. 10.
Offshore one-year non-deliverable forward contracts have also moved closer to spot levels, indicating market expectations for future depreciation are moderating.
(agencies)
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