Yuan sets new record high as U.S. Treasury Secretary visits
* Yuan touches high of 6.2120 before trimming gain
* PBOC guides yuan up despite dollar strength
* Traders say China shows goodwill to visiting Jack Lew
* Overall, PBOC favours yuan/dollar stability for now
SHANGHAI, March 20 (Reuters) - The yuan hit an all-time high against the dollar on Wednesday in what traders said was a goodwill gesture by China's central bank towards U.S. Treasury Secretary Jack Lew, who is in Beijing for strategic discussions. The PBOC guided the yuan higher through a stronger official midpoint rate, despite the fact that the dollar index was also rallying in global markets. Spot yuan touched 6.2120 per dollar around mid-morning, its highest level since China set up the domestic foreign exchange market in 1994 and toppling the former record high of 6.2124 set on Jan. 14 this year. The currency trimmed some gains during the later half of the morning session to trade at 6.2125 at midday, still up 0.05 percent from Tuesday's close of 6.2157. Volume was moderate at $4.5 billion, down slightly from $4.6 billion on Tuesday morning. Before trading began, the People's Bank of China (PBOC) surprised market observers by setting its official midpoint 0.07 percent stronger than Tuesday's fix, even though the dollar index retained its strength in Asian morning trade after an overnight rally. Ordinarily, traders say, the central bank sets the midpoint inversely to moves in the dollar index, with an eye on movements in other currencies like the yen as well. "It's a clear goodwill gesture to the U.S. Treasury," said a trader at a major Chinese state-owned bank in Beijing. The U.S. has traditionally pressed China for a stronger yuan, although the issue has become less of a diplomatic irritant as the Chinese trade surplus has shrunk as a share of GDP. The trader said Wednesday's gesture was temporary, and he expected the rate to fall back when Lew's visit ended. If the yen and other Asian currencies fall much further, some traders predict the PBOC could even force the yuan weaker by as much as two percent. China and the United States put trade and economic issues at the top of their diplomatic agenda as President Xi Jinping met Jack Lew on Tuesday and called for the two sides to focus on shared interests rather than differences.
The onshore spot yuan market at a glance:
Item Current Previous Change
PBOC midpoint 6.2716 6.2758 +0.07 Spot yuan 6.2125 6.2157 +0.05 Divergence from -0.94
Spot change ytd +0.29 Spot change since 2005 revaluation +33.22
*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 6.2095 *+0.05
Offshore non-deliverable 6.3070 **-0.65
*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 heightened 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 PBOC's Yi sees faster progress on capital account reforms - 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 Eric Meijer)