Yuan softens before close on possible intervention
* C.bank sets stronger midpt despite overnight move in dollar index
* Spot rate at strong side of limit until near-end of day
* Corporates eroding hard currency reserves to buy yuan -strategist
(Updates to close)
SHANGHAI, Nov 6 (Reuters) - The yuan closed two points weaker on Tuesday thanks to a last minute bout of dollar buying, but otherwise hugged the strong side of its trading band over the course of the day.
The People's Bank of China (PBOC) set its midpoint at 6.3078 p er dollar on Tuesday morning, slightly firmer than Monday's fix, despite a strengthening trend in the dollar index.
Spot yuan opened at the limit of the trading band at 6.2447 in morning trade and mostly stayed there, causing the intra-day graph to resemble a flatline for the large part of the day. (Graphic: http://link.reuters.com/mew73t)
But at 4.17 p.m. local time, a few bids came in that pushed the exchange rate away from the band, causing the yuan to close at 6.2456, two pips weaker than Monday's close but nine pips away from its strong-side limit.
The dollar/yuan exchange rate is allowed to rise or fall 1 percent from the midpoint each day, and on normal trading days the currency stays within this range.
But in recent weeks the yuan spot rate has constantly bounced along the edge of the strong side trading band, suggesting a misprision of the yuan's proper value.
This behavior has drawn different explanations.
Dariusz Kowalczyk, economist at Credit Agricole CIB, pointing out that data showed that Chinese corporations sent more hard currency abroad that they received in September, meaning that they are effectively draining key hard currency reserves to get their hands on yuan.
``Corporates do not have the dollars to buy CNY; their dollar flows are negative so they are drawing down their dollar reserves. That is not sustainable.''
He said that corporates may be buying yuan because they think domestic growth is set to recover; others said it might be in reaction to the third round of monetary easing in the United States, dubbed QE3, which some expect to cause further dollar depreciation.
Robert Minikin, senior forex strategist at Standard Chartered in Hong Kong, said he suspects the central bank has started to intervene in recent weeks as the yuan spot has repeatedly resisted midpoint guidance and hit repeated historical highs against the dollar.
He said anomalous trades, such as that which occurred at the market close, could be the central bank attempting to rein in the spot market through intermediary banks.
Other traders agreed that the central bank may have increased its meddling in October, first by allowing the yuan to rise to all-time highs in the run-up to the U.S. presidential election, and then to pull the currency back before it damages competitiveness.
Peng Wensheng, chief economist at China International Capital Corporation (CICC), pointed out in a research note distributed on Tuesday that the central bank had only bought a modest 2 billion yuan worth of forex in September, which passively supported the yuan's strengthening trend.
Ordinarily the central bank buys dollars in exchange for yuan, which results in yuan pouring into the spot market, putting downward pressure on the currency's relatively value.
``The central bank did not actively intervene in the FX markets (in September), and even appeared to take the initiative to guide the renminbi higher,'' Peng wrote.
But he also said that the currency is now near its proper equilibrium level and is unlikely to appreciate much further.
``From a short-term perspective, the impact of QE3 is unlikely to persist. In addition, the central bank will not allow a sustained sharp appreciation of the renminbi.''
(Editing by Jacqueline Wong)