Yuan closes near 4-week low; China c.bank reacts to Asian currency war
* Yuan closes down 0.13 pct at 6.2270/dollar
* PBOC seen buying USD in response to weak JPY, KRW
* Corporate yuan demand still strong - traders
* Stability expected through Lunar New Year
(Updates to close) SHANGHAI, Feb 1 (Reuters) - China's yuan closed near a four-week low on Friday after the central bank appeared to intervene to weaken the currency in response to declines in the yen and other Asian currencies. Traders observed a large state-owned bank bidding for dollars aggressively throughout the day, while unusually heavy volume also hinted at the presence of the People's Bank of China (PBOC) in the market. Traders say corporate yuan demand is strong but the central bank is using its daily midpoint as well as ad hoc dollar-buying to restrain appreciation and blunt the impact on Chinese exports from recent devaluation by Asian neighbours. The yen plumbed fresh multi-year lows against the dollar and euro on Friday, having posted its biggest monthly decline in 12 years versus the euro as the market positioned for more aggressive easing from the Bank of Japan. The yuan hit an intra-day low of 6.2296 per dollar in late morning and closed at 6.2270, 0.13 percent softer than Thursday's close and down 0.10 percent on the week. The dollar index has also fallen this week, driven by strength in the euro. The PBOC has traditionally set stronger yuan fixings in response to a decline in the index. But traders say the PBOC is now focused on the yen and other Asian currencies such as the Korean won, which carry little weight in the dollar index. The won also touched a three-month low this week. In addition to the impact of the midpoint, traders also suspect that the PBOC continues to intervene directly in the market by buying dollars. A trader at a city commercial bank in Shanghai estimated the size of PBOC's interventions at around $1 billion per day in recent weeks, though he cautioned this was a rough guess. The PBOC appeared to take its intervention up a notch on Friday, a pattern also observed on previous Fridays. Volume totaled $22.5 billion, compared to an average of around $17.6 billion this year. Traders generally expect the yuan to hold steady through the Lunar New Year holiday. China's interbank FX market will be closed from Feb. 9 to 15. Appreciation pressure from strong corporate demand is likely to continue, traders say, as many companies still have long dollar positions to unload. But whether authorities allow that pressure to express itself depends on whether the so-called "currency war" ramps up.
The onshore spot yuan market at a glance:
Item Current Previous Change
PBOC midpoint 6.2819 6.2795 -0.04 Spot yuan 6.2270 6.2188 -0.13 Divergence from midpoint -0.87* Spot change ytd +0.05 Spot change since 2005 +32.91
Volume (USD bn) 22.5 16.4
*Divergence of the dollar/yuan exchange rate. Negative number indicates that spot yuan is trading stronger than the midpoint. 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
The offshore yuan market at a glance:
Instrument Current Difference from
Offshore spot yuan 6.2140 +0.21*Offshore non-deliverable 6.3168 -0.55**
*Premium for offshore spot over onshore
**Figure reflects difference from PBOC's official midpoint, since non-deliverable forwards are settled against the 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 Richard Borsuk)