Yuan up near 2-month high, but traders not betting on appreciation
* Yuan gains 0.03 percent to 6.2144 near midday
* Strong corporate yuan demand supports appreciation
* But c.bank using midpoint to enforce stability
* Currency war fears make heavy appreciation unlikely
SHANGHAI, March 13 (Reuters) - The Chinese yuan edged up to a near two-month high on Wednesday, as the central bank responded to the fall of the dollar in global markets but maintained its overall stance in favour of stability. Spot yuan touched 6.2139 per dollar in early trade, its strongest level since Jan. 15, and was trading around 6.2144 near midday, a gain of 0.03 percent over Tuesday's close. The spot rate's gain matched the change in the People's Bank of China's (PBOC) daily midpoint. The PBOC fixed the yuan at 6.2726 on Wednesday morning, 0.03 percent firmer than Tuesday's fix. Traders have said consistently in recent months that yuan demand from clients is heavier than dollar demand, and official data tells a similar story. But market players are squarely focused on the central bank midpoints for guidance on whether the spot rate will be allowed to appreciate, and clients are cautious about building long yuan positions, traders say. Despite central bank rhetoric about reducing intervention and letting market forces play a stronger role in setting the exchange rate, the central bank has limited the extent to which this market pressure for appreciation has been allowed to express itself. Spot yuan has continuously traded near the top-end limit of its trading band since September last year, indicating that the central bank is using its midpoint to restrain appreciation. Traders say the PBOC wants to hold the yuan steady amid concerns about competitive devaluations by Asian neighbors such as Japan, South Korea, Taiwan, and the Phillipines. On the other hand, the PBOC has so far not acted to aggressively pull the Chinese currency weaker in response to heavy depreciation of the Japanese yen and other Asian currencies. In fact, the yuan has gained 25.3 percent against the Japanese currency from October through Tuesday's close, compared to a 23.3 percent gain for the dollar against the yen. On Wednesday, the PBOC stuck to its usual pattern of fixing the yuan stronger in response to a fall in the dollar index , which lost 0.24 percent overnight Shanghai time.
The onshore spot yuan market at a glance:
Item Current Previous Change (pct) PBOC midpoint 6.2726 6.2746 +0.03%Spot yuan 6.2144 6.2162 +0.03%Divergence from -0.93%
Spot change ytd 0.26% Spot change since 2005 33.18%
*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 6.2110 *0.06%
Offshore non-deliverable 6.3024 **-0.47%
*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's trade surpluses mainly driven by weak imports rather than strong exports. GRAPHIC: http://link.reuters.com/qav68s - Corporate yuan purchases in recent months reflect yuan appreciation expectations or at least a reduction in long dollar positions. GRAPHIC: http://link.reuters.com/syx74t
- Hot money inflows, which should support yuan appreciation, returned in Jan following nine straight months of outflows. GRAPHIC: http://link.reuters.com/raz74t - Despite relatively stable dollar/yuan exchange rate, the yuan is appreciating on a trade-weighted basis. GRAPHIC: http://link.reuters.com/sed74t
RECENT DEVELOPMENTS - China restrains yuan rise in response to Asian currency weakness - China eyes market forces to drive FX reform
- Bank of China extends yuan deposits to promote redback's rise - Taiwan yuan bonds may be dogged by policy barriers
- 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
(Editing by Jacqueline Wong)