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Yuan largely steady as China central bank seeks stability

The yuan was largely flat against the dollar on Wednesday after the central bank set a midpoint that was weaker than the previous day’s fixing but stronger than the market had expected.

As increasing instability in the euro zone has pushed the dollar up since the start of this month, the People’s Bank of China has kept the yuan firmly above 6.3 versus the greenback.

That has sent a signal to the market that the government hopes to keep the yuan stable, traders said, adding that the strategy reflects a Chinese tradition to keep its currency largely flat amid global economic and market uncertainties.

Traders also reported a reduced supply of dollars in the domestic market in recent months, reflecting slowing capital inflows into China as the country’s export growth decelerates.

“There is a rough balance of dollar supply and demand in recent months, and that has kept the yuan around 6.3 per dollar,” said a trader at a European bank in Shanghai.

“The government appears to have been alarmed by enduring global economic weaknesses, and the PBOC’s relatively strong midpoint helps to stabilise sentiment towards the yuan.”

Spot yuan opened at 6.3088 per dollar on Wednesday, 8 pips weaker than Tuesday’s close of 6.3080.

It was trading at 6.3097 at midday.

The PBOC set Wednesday’s mid-point at 6.2865, slightly weaker than Tuesday’s 6.2804.

In global markets, the dollar index tested its key resistance at 80 in Asian trade, buoyed by a fall in the euro to near its 3-month low.

Tradition

Spot yuan has consistently traded below the midpoint since mid-March.

Despite expectations that the yuan will appreciate by a mild 2-3 percent this year, the currency has actually fallen slightly against the dollar this year amid global weakness and worries of a slowdown in the world’s second-largest economy.

China’s GDP grew 8.1 percent in the first quarter of this year, its slowest rate in nearly three years.

Spot yuan is still up 8.2 percent since it was officially depegged from the dollar and allowed to float within a range set by the central bank in June 2010. It has jumped 31 percent since July 2005 when Beijing revalued it by 2.1 percent.

However, for two years from mid-2008 during the peak of the global financial crisis, the government kept the yuan pegged closely to the dollar, reflecting a desire to keep the currency stable during global economic and market turmoils.

“The yuan’s midpoint has been set in a narrower range in recent weeks compared with March,” a trader at an Asian bank in Shanghai noted.

“The PBOC appears to be taking action to respond to the worsening crisis in the euro zone.”

The yuan is likely to move within a narrow range this week, with resistance seen at 6.29 and support at 6.33, traders said.

Offshore one-year non-deliverable yuan forward contracts continued to trade at a discount to the spot price at 6.3500, a discount of 1 percent from Wednesday’s midpoint.

Offshore yuan prices continued to follow onshore spot yuan, trading around 6.311 on Wednesday.