Yuan closes up in strong trade as market prepares for holiday
(Updates to close) SHANGHAI, Feb 5 (Reuters) - The yuan closed stronger on Tuesday as traders said customers were settling their currency positions ahead of the Spring Festival, during which mainland markets will be closed for a week. Chinese authorities have responded to the dramatic fall in the Japanese yen and other Asian currencies in recent weeks by tightening their grip on the yuan and beating back market pressure for the Chinese currency to appreciate. In a break with typical practice, the PBOC has guided the yuan slightly weaker over the last two weeks, despite a fall in the dollar versus the euro. The central bank continued this practice on Tuesday by setting a slightly stronger midpoint despite the fact that the dollar index rose in overnight trade, surprising traders. "The market expected the central bank to keep weakening the midpoint, so when it strengthened it, that triggered a lot of stop-loss orders," said a trader at a joint stock bank in Shanghai. He added that the market expects to see more volatility and a wider range in trading quotes in coming days as companies make quick moves to short up their forex positions before markets shut for all of next week. Transaction volumes increased in the afternoon session after a tepid start, finishing at nearly $20 billion, slightly below Monday's final volume.
The onshore spot yuan market at a glance:
Item Current Previous Change (pct) PBOC midpoint 6.285 6.286 +0.02Spot yuan 6.2294 6.2328 +0.05Divergence from -0.88
Spot change ytd +0.01 Spot change since +32.86
*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 , which is not restrained by the
onshore midpoint, continued to trade at a slight premium to the onshore version, as it has since the onshore spot market began rallying in November. One-year offshore non-deliverable forwards (NDFs), considered an imperfect indicator of expectations for future appreciation or depreciation, continued to imply depreciation for the yuan in the next 12 months.
The offshore yuan market at a glance:
Instrument Current Difference from
Offshore spot yuan 6.2145 +0.24*
Offshore 6.3165 -0.50**
non-deliverable forwards (pct)
*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 - China restrains yuan rise in response to Asian currency weakness - Corporates get tough lesson in FX risk from central bank
- 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)