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Yuan eases as Fed taper boosts dollar

Gabriel Wildau
Thursday, 19 Dec 2013 | 12:25 AM ET

* Yuan falls slightly after big USD gains overnight

* Fed tapering action pushes up dollar globally

* C.bank sets weakest fixing since Dec. 6

* But yuan appreciation pressure still present

SHANGHAI, Dec 19 (Reuters) - China's yuan edged slightly weaker on Thursday after the dollar surged in global markets in response to the U.S. Federal Reserve's decision to reduce its monetary stimulus. China's central bank set its daily midpoint at 6.1183 per dollar on Thursday, its weakest fixing since Dec. 6, after the dollar index gained strongly overnight on the Fed's action. Spot yuan lost 0.02 percent to 6.0729 near midday. The weaker fix broke a string of three straight gains in the midpoint. The People's Bank of China (PBOC) often fixes the yuan weaker in response to dollar gains in an effort to hold the Chinese currency roughly stable against non-dollar currencies. But yuan depreciation may not last as traders said they continue to observe heavy yuan buying demand in the market. "The influence of the Fed's decision may amount to a one-day tour," said a trader at a mid-sized bank in Shanghai. The Chinese currency is facing upward pressure as the country's trade surplus remains large and rising Chinese interest rates attract hot money inflows. Tight conditions in China's money market could also support the Chinese currency. Interest rate swaps set a record high on Thursday. Traders say the PBOC is likely to hold the spot rate roughly steady for the remainder of this year, before allowing the currency to resume mild appreciation early next year.

The onshore spot yuan market at a glance:

Item Current Previous Change (pct) PBOC midpoint 6.1183 6.1105 -0.13 Spot yuan 6.0729 6.0718 -0.02

Divergence from midpoint* -0.74 (pct)

Spot change ytd 2.59 Spot change since 2005 revaluation 36.29

*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 6.0743 -0.02* Offshore non-deliverable 6.1315 -0.22**

forwards

*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 - Hot money distorts China's exports as speculators seek to cash in on yuan, rate reforms - China central bank suggests faster tempo for freeing yuan

- China investors face bumpy ride as reform speculation intensifies - CHINA MONEY - PBOC preparing market for more yuan volatility

KEY DATA POINTS - Hot money returned to China in Sept, Oct after two months of outflows GRAPHIC: http://link.reuters.com/saz74t - China's trade surpluses mainly driven by weak imports rather than strong exports. GRAPHIC: http://link.reuters.com/qav68s - Corporate FX behavior reflects yuan appreciation expectations. GRAPHIC: http://link.reuters.com/tyx74t - Despite relatively stable dollar/yuan exchange rate, the yuan is appreciating on a trade-weighted basis. GRAPHIC: http://link.reuters.com/sed74t

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(Editing by Jacqueline Wong)