Yuan inches higher against dollar
Shanghai, May 21, 2012
The yuan edged higher against the dollar on Monday on short-covering triggered by the euro's gains, while a stronger mid-point set by the central bank also helped boost sentiment, traders said.
At a G8 summit over the weekend, leaders of the eight countries vowed to take all steps necessary to combat financial turmoil, but lack of specific measures on Greece failed to allay worries completely.
The euro extended its rebound from last week's four-month low on Monday but investors attributed its bounce also to short-covering rather than economic fundamentals.
"Banks and their clients built yuan short positions during a dollar rally this month, and some believe it is the time to cover the positions," said a trader at a US bank in Shanghai.
"The market widely expects the yuan could continue to move in its well-established traded zone of 6.29-6.33 in the near term if the dollar stabilises in global markets."
The slightly stronger midpoint, which suggested that the government will keep the yuan stable, also helped, traders said.
Spot yuan was trading at 6.3249 per dollar at midday, up slightly from 6.3284 at Friday's close.
Before trading began, the PBOC fixed the daily midpoint slightly stronger at 6.3116 against the dollar compared with Friday's midpoint of 6.3209, reflecting a fall in the dollar index in global markets.
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, although it has also signalled that it would tolerate a measured depreciation.
The midpoint is the central bank's base rate for the yuan to rise or fall by a maximum 1 per cent against the dollar in a day.
The yuan has been under depreciation pressure recently, as China's economy showed unexpected weakness in April amid worsening political and economic conditions in the euro zone.
Growth in China's gross domestic product (GDP) slowed to a nearly three-year low of 8.1 per cent in the first quarter. Many economists now believe the growth of the world's second-largest economy could fall below 8 per cent in the second quarter.
Offshore one-year non-deliverable yuan forward contracts continued to trade at a premium to the spot price, changing hands at 6.3835 in the afternoon session for a discount of 1.13 per cent to Monday's midpoint.
Offshore spot yuan was trading around 6.3240 around mid-session, largely in line with the trend in the onshore spot market. – Reuters