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Yuan steady at midday, tight money market adds to appreciation pressure

Gabriel Wildau
Friday, 20 Dec 2013 | 1:03 AM ET

* Yuan unchanged at 6.0713/dlr at midday

* Tight yuan liquidity offsets impact of weaker c.bank fix

* Traders see yuan holding near 6.07 through year end

* Trade surplus, hot money flows support appreciation

SHANGHAI, Dec 20 (Reuters) - China's yuan was flat at midday on Friday, with traders saying tight liquidity in the domestic money market offset the impact of a weaker central bank fixing. Spot yuan changed hands at 6.0713 yuan per dollar at midday, unchanged from Thursday's close, after the central bank set its daily midpoint 0.02 percent weaker at 6.1196, its lowest fixing since Dec. 6. Rising short-term interest rates in the interbank cash market is adding to demand for the Chinese currency. China's benchmark money market rate climbed to a six-month high on Friday, despite attempts by the central bank to calm sentiment.

"We'll keep some dollar reserves on hand, but we won't take any long dollar positions. The cost is pretty high, especially with domestic liquidity being so scarce," said a trader at a foreign bank in Shanghai. Traders expect spot yuan to hover around 6.07 through next year. Even if the cash crunch subsides, China's resilient goods trade surpluses will continue to support appreciation next year. Still, traders expect the central bank will persist in using its midpoint to moderate the pace of yuan gains. In addition, hot money inflows from investors attempting to profit from both yuan gains and rising interest rates are also supporting yuan appreciation. Even if short-term money market rates return to normal levels, longer term rates are on a secular upward trend, as China pushes ahead with liberalisation of interest rates.

The benchmark yield on 10-year Chinese government bonds remains near the record high touched last month. These higher rates will serve to attract inflows, analysts say.

The onshore spot yuan market at a glance:

Item Current Previous Change (pct) PBOC midpoint 6.1196 6.1183 -0.02 Spot yuan 6.0713 6.0713 0.00

Divergence from midpoint* -0.79 (pct)

Spot change ytd 2.62 Spot change since 2005 revaluation 36.32

*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 6.0723 -0.02* Offshore non-deliverable 6.1387 -0.31**

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 Shri Navaratnam)