SHANGHAI, May 7: The yuan firmed onshore after the central bank guided the currency market higher on Tuesday by setting a firmer midpoint, but the offshore market valued the yuan at a discount as overseas investors reconsidered the sustainability of the current rally.
The onshore market posted a brief but sharp correction on Monday after authorities issued regulations limiting banks’ long yuan positions as part of a campaign to crack down on hot money inflows.
The onshore market has mostly recovered from Monday’s swoon, with the spot yuan changing hands at 6.1579 by midday, up from the previous day’s close of 6.1667 but still below the intra-day record high of 6.1522 set at Monday’s open.
The offshore market has turned to discounting the yuan traded in Hong Kong (CNH) this week. On Monday the CNH slid abruptly to change hands at 6.1720 per dollar during intra-day trade, and the market continued to discount the yuan again on Tuesday, although to a lesser extent.
There are signs of increasing caution in the onshore market as well. The exchange rate is allowed to diverge from the midpoint by 1 percent in either direction on a given day, but in recent months it has ordinarily traded adjacent to the strongest allowed intra-day position, implying that the rate was effectively being leashed by the regulatory limit alone.
On recent trading days, however, the exchange rate has begun to give the band edge a wider berth. The rate closed 0.72 percent away from the midpoint on Monday and 0.81 percent by midday on Tuesday.
Given the position of the midpoints on those days, the result was that market players refrained from pushing the yuan to new record highs against the dollar on Tuesday, even though the central bank setting allowed for it – another departure from ordinary market behavior so far this year. Today’s midpoint setting was 6.2083 per dollar, just one pip short of the all-time record high fix of 6.2082 set on May 2.
On Monday China’s cabinet called for the drafting of detailed plans to help achieve full convertibility of the yuan CNY=CFXS, and on the same day a central bank official told Reuters that the government is preparing to let individuals and small companies begin settling trade in yuan by the end of the year.
Deputy PBOC governor Yi Gang said at a forum in Washington in April that conditions are now appropriate to further open China’s capital account and widen the yuan trading band.
The contrast between pro-reform rhetoric and signs of increasing intervention in daily market operations has caused some to question how quickly Beijing is willing to move to put its money where its mouth is.
‘The kind of appreciation to bring the CNY to the point where risks are truly two-way is likely to be large enough to inflict serious damage to the real economy,’ wrote Louis Kuijs and Tiffany Qiu of RBS in a research note to clients.
With this in mind, in combination with the existence of a sustained ‘sizeable’ current account surplus in China, Kuijs and Qiu expressed some skepticism that recent announcements of plans to introduce more two-way volatility into the market will be implemented soon.
(AGENCIES)
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