Yuan nears fresh record as band widening talk swirls
HONG KONG, Aug 12 (Reuters) - China's yuan strengthened on Thursday after the central bank set the daily fixing midpoint within a whisker of its recent record high ahead of a week-long holiday. As the People's Bank of China fixed the yuan's daily midpoint rate inexorably higher this month, whittling away at the gap between the daily fixing rate and the spot rate, foreign exchange traders have been caught by surprise. That has sparked talk that Beijing is preparing the ground work for an eventual widening of the yuan's trading band. The band was last widened to 1 percent on either side of the daily fixing in April. Investors' focus on the yuan exchange rate has intensified ahead of the announcement of details of a new free trade zone in Shanghai and before an important Communist Party meeting in November. By midday, the yuan was trading slightly stronger at 6.1192 against the U.S. dollar than the previous close of 6.1200 after the People's Bank of China fixed the daily midpoint at 6.1477, a shade above Monday's record high setting of 6.1474. The recent spate of higher fixings amid steady market conditions has cut the gap between the daily fix and the spot rate to less than 300 pips from more than 600 pips in May. "The combination of spot trading volatility being kept intentionally very low and the fixing being guided towards spot, thus opening up 'space' in the dollar/yuan trading band, implies to us that we could be on the cusp of another widening in the (USD/CNY) trading band," Sacha Tihanyi, a senior currency strategist at Scotia Bank said in a note on Thursday. Shanghai will launch its trial free trade zone (FTZ) on Sept. 29. The zone will feature liberalised foreign exchange and interest rates in the form of new financial products.
While talk of a trading band widening has bubbled up to the surface of investors' radar in recent days, volatility gauges on currency options suggest market positioning if anything, is far from pricing any imminent move.
The onshore spot yuan market at a glance:
Item Current Previous Change PBOC midpoint 6.1477 6.1497 0.03% Spot yuan 6.1192 6.12 0.01%
Divergence from midpoint* -0.46%
Spot change ytd 1.82% Spot change since 2005 revaluation 35.25%
*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 Offshore spot yuan 6.1173 0.03% Offshore non-deliverable 6.1945 -0.76%
*Premium for offshore spot over onshore
**Figure reflects difference from PBOC's official midpoint, since non-deliverable forwards are settled against the midpoint. .
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> RECENT DEVELOPMENTS - Yuan rally starts to fade as capital inflows to China slow
- ANALYSIS-Bullish yuan herd leaves China fundamentals in the dust - Currency war or no, Beijing doesn't want Asia to take stable yuan for granted - China opens new front in money war as yuan speculation distorts export data
KEY DATA POINTS - Gap between PBOC midpoint and spot rate is narrowing. GRAPHIC: http://link.reuters.com/qyx74t - China's trade surpluses mainly driven by weak imports rather than strong exports. GRAPHIC: http://link.reuters.com/qav68s - Corporate FX purchases in May show reduction in yuan appreciation expectations. GRAPHIC: http://link.reuters.com/tyx74t - Hot money inflows turn to outflows in May 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)