C.bank guides yuan lower despite strong demand; offshore premium evaporates
* C.bank sets unexpectedly weak midpoint
* Corporate yuan demand remains strong
* Next few days key for judging near-term trend
* Offshore yuan premium gone as CNH deposits grow
SHANGHAI, Jan 29 (Reuters) - China's yuan slipped to a three-week low on Tuesday in the spot market after the central bank again confounded the market by setting a weaker midpoint, despite little movement in the dollar overnight. The People's Bank of China (PBOC) generally sets a firmer daily midpoint stronger in response to a weakening of the dollar index, but it has broken with this trend this week. The dollar index was unchanged between Monday and Tuesday mornings, but the PBOC still set its midpoint 0.05 percent weaker at 6.2851 per dollar on Tuesday morning, its weakest fix since Jan 7. Traders said that client demand for yuan remains strong and are reluctant to predict its near-term. "The next few days will be key," said a trader at a joint-stock bank in Shanghai. Both the midpoint and spot rates appear to be at a crossroads, and traders are uncertain whether the recent weakening trend will continue or whether strong corporate demand for the Chinese currency will allow it to return to the record high of 6.2126 touched on Jan 11. That record capped a rally that began in late July last year. There was a possibility that the central bank is actively using the midpoint to restrain excessive yuan appreciation. A senior PBOC official on Monday reiterated the official view that the Chinese currency is "relatively close" to equilibrium.
Item Current Previous Change close (pct) PBOC midpoint 6.2851 6.2818 -0.05 Spot yuan 6.2250 6.2226 -0.04 Divergence from midpoint* -0.96 Spot change ytd +0.09 Spot change since 2005 +33.0
*The People's Bank of China (PBOC) allows the exchange rate to rise or fall 1 percent from official midpoint rate it sets each morning.
OFFSHORE CNH MARKET Data out on Friday showed that net yuan demand from corporates hit its highest level in at least two years in December. Such data supports the view that if the central bank allows market forces to guide the market, the yuan should gain further. In the offshore market, data out on Monday showed that yuan deposits in Hong Kong grew by 32 billion yuan ($5.14 billion) in December, the biggest monthly gain since mid-2011. Along with reduced appreciation expectations, the larger yuan supply in Hong Kong helps explain why the offshore yuan premium that persisted from late November through mid-January has now shifted to a slight discount.
The offshore yuan market at a glance:
Instrument Current Difference from
Offshore spot yuan 6.2260 *-0.02Offshore non-deliverable 6.3176 **-0.52
* The difference between onshore spot and the onshore spot
** Offshore one-year non-deliverable forwards (NDFs) reflect market expectations for appreciation or depreciation of PBOC's official midpoint.
MARKET DRIVERS --Forces underpinning yuan rally to lose steam in 2013
--Spot yuan has rallied strongly since late July 2012, and the PBOC is using its daily midpoint to restrain further appreciation. GRAPHIC: http://link.reuters.com/pyx74t --China's trade surplus surged in late 2012, but the surge was mainly due to weak imports rather than strong exports. GRAPHIC: http://link.reuters.com/qav68s --Corporate yuan purchases still exceed dollar purchases, but the gap is narrowing. Exporters are converting progressively smaller portions of their foreign exchange receipts into yuan. GRAPHIC: http://link.reuters.com/syx74t --Hot money outflows may be putting downward pressure on the yuan. GRAPHIC: http://link.reuters.com/saz74t --Despite relatively stable dollar/yuan exchange rate, the yuan is appreciating on a trade-weighted basis. GRAPHIC: http://link.reuters.com/sed74t
(Editing by Simon Cameron-Moore)