Yuan breaks losing streak; c.bank signals appreciation tolerance
* Yuan firms to 6.2201/dlr at midday
* C.bank midpoint finally responds to weaker dollar
* Traders say c.bank influenced by technical levels
* Stronger fix may signal tolerance of moderate appreciation
SHANGHAI, Jan 30 (Reuters) - China's currency strengthened for the first time in a week on Wednesday after the central bank set a weaker fixing, which allowed the spot rate to respond to robust corporate demand for yuan. The People's Bank of China's strong fixing of 6.2806 marked a return to its usual practice of setting a stronger midpoint in response to a fall in the dollar against other currencies overnight. The PBOC had surprised the market with a series of weak fixings in recent days, despite weakness in the dollar. That pulled the spot rate weaker, even as traders reported healthy client demand for yuan. But several traders had identified 6.2850 per dollar as a technical support level for the midpoint. When the fixing hit 6.2851 on Tuesday, several traders said that if it weakened further, that would indicate the PBOC's intention to guide the yuan on an extended weakening path. Now, they say, the apparent rebound likely signals that authorities will allow the spot rate some space to appreciate over the next month, though they expect it will largely move sideways in the run-up to the Lunar New Year, which begins on Feb 9. Although the midpoint is generally viewed as a policy signal, rather than the product of market forces, traders say policymakers at the PBOC are aware of key technical levels and strive to keep the midpoint consistent with technical principals.
The onshore spot yuan market at a glance:
Item Current Previous Change close (pct) PBOC midpoint 6.2806 6.2851 +0.07 Spot yuan 6.2201 6.2243 +0.07 Divergence from midpoint* -0.96 Spot change ytd +0.16 Spot change since 2005 33.06
*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. Negative number indicates spot yuan is trading stronger than the fix.
OFFSHORE CNH MARKET
The offshore yuan market at a glance:
Instrument Current Difference from
Offshore spot yuan* 6.2170 +0.05*Offshore non-deliverable 6.3040 -0.37**
*Premium for offshore spot over onshore
**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
- Offshore yuan premium returns as market bets on appreciation - 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 Kim Coghill)