Yuan up on euro strength, aligns with trade-weighted basket

SHANGHAI, June 18: The yuan edged up against the dollar on Monday, buoyed by a rebound in the euro after pro-bailout parties in Greece won a slim parliamentary majority, easing fears that Greece may exit the euro zone.
The euro-driven yuan rally was yet another signal that the Chinese currency may now be moving more closely in connection with a trade-weighted basket, as indicated by the latest data issued by the Bank for International Settlements (BIS).
The BIS index for the yuan’s real effective exchange rate (REER) – the currency’s value against a trade-weighted basket after adjustments based on inflation – appreciated 2.07 percent to 109.72 in May from 107.5 in April, BIS data published over the weekend showed.
The yuan’s nominal effective exchange rate (NEER), its value before inflation adjustments, rose 0.88 percent to 106.06 points in May from 105.14 in April, the data showed.
‘While the U.S. Dollar, the euro and other major world currencies have become increasingly unstable in recent years, China appears to be serious about letting the yuan move more in line with a trade-weighted basket,’ said a trader at a major Chinese state-owned bank in Beijing.
‘So the yuan’s fall against the dollar in May was offset by its rise against the euro,’ he said. ‘The trend is likely to continue in the near term.’
Spot yuan was trading at 6.3535 per dollar at midday on Monday, up from 6.3651 at Friday’s close.
In May, the currency posted its biggest monthly drop against the dollar on record, nearly 1 percent, responding to the strengthening of the U.S. Dollar in global markets in the month during the peak of the euro zone political and debt crises.
Despite its rise, the yuan was still trading far weaker than the Chinese central bank’s midpoint, the base rate against which the dollar/yuan pair may rise or fall by 1 percent in a day.
The People’s Bank of China (PBOC) has recently set a series of midpoints stronger than the yuan’s trading level, as it seeks to keep the exchange rate relatively stable as China’s economy showed signs of a significant slowdown this year.
On Monday, the PBOC fixed the midpoint at 6.3005 against the dollar, stronger than Friday’s 6.3089, reflecting a global dollar weakening as the euro briefly hit a one-month high, buoyed by the Greek election result.
Offshore one-year non-deliverable yuan forward contracts changed hands at 6.3838 in the afternoon to imply a yuan deprecation of 0.93 percent against the dollar based on Monday’s midpoint.
Offshore spot yuan traded at 6.3620 at midday, slightly weaker than the onshore spot level.


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