Yuan dips on c.bank guidance; currency war fears seen limiting appreciation
* Spot yuan down 0.04 pct to 6.2163 at midday
* C.bank using midpoint to hold exchange rate steady
* Yuan could fall by 2 pct in currency war scenario
* Fundamentals still support appreciation
SHANGHAI, March 14 (Reuters) - China's yuan retreated on Thursday from a near two-month high as the central bank responded to the dollar's gains in global markets, while signaling it intends to keep the currency mostly steady. Spot yuan slid to 6.2163 per dollar at midday, down 0.04 percent from Wednesday's close. The slight fall matched the change in the central bank's daily midpoint, which the People's Bank of China (PBOC) set at 6.2752, 0.04 percent softer than Wednesday's fix. The weaker midpoint came in response to slight gains in the dollar against other major currencies overnight.. With currency war fears still brewing amid the weakening of the Japanese yen and other Asian currencies, traders see little space for the yuan to appreciate substantially in the weeks ahead. On the contrary, some predict that the PBOC could push the yuan weaker by as much as 2 percent if other Asian currencies depreciate further. Expectations of stability or depreciation come despite economic fundamentals supporting yuan appreciation. China has posted strong trade surpluses in recent months. Data also suggests a return of net hot money inflows in January following nine months of net outflows. And importers and exporters have increased net yuan purchases in recent months, while decreasing dollar purchases. (GRAPHIC: http://link.reuters.com/syx74t)
The onshore spot yuan market at a glance:
Item Current Previous Change
(pct)
PBOC midpoint 6.2752 6.2726 -0.04% Spot yuan 6.2165 6.2138 -0.04%
Divergence from midpoint* -0.94%
Spot change ytd +0.22% Spot change since 2005 revaluation +33.14%
*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
onshore (pct)
Offshore spot yuan 6.2135 *0.05%
(pct)
Offshore non-deliverable 6.3065 **-0.50%
forwards
*Premium for offshore spot over onshore
**Figure reflects difference from PBOC's official midpoint, since non-deliverable forwards are settled against the midpoint. .
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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 a 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
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(Editing by Kim Coghill)