Shanghai: Buoyed by positive economic data, China’s yuan rose to a record high on Monday as persistent dollar selling by Chinesecompanies drove the spot rate to its maximum daily limit after the central bank set an unusually strong midpoint rate.
The People’s Bank of China (PBOC) fixed the midpoint at 6.2920 per dollar—the strongest fix since May—and sharply up on Friday’s midpoint of 6.3012.
But the market was even more bullish than the central bank, as it has been for nearly a month now, and the spot yuan rate swiftly hit the 1% limit of its trading band to repeatedly trade at or around 6.2291 against the dollar until the close, for a gain of 0.25% on the day.
Under China’s managed float, the dollar/yuan rate is allowed to diverge 1% in either direction from the official midpoint each day.
Monday’s market open, traded levels and the record close marked the strongest trading day since China opened its domestic currency market in 1994.
Traders said that positive domestic data, including stronger-than-expected export growth and recent purchasing manager index (PMI) figures, had boosted already strong confidence in the yuan.
“Improving PMI and trade data helped convince the market that the yuan still still has room to appreciate,” said a trader at an international bank in Shanghai.
The yuan is up more than 2.6% from a weak point it struck in late July, and stands more than 1% up for the year-to-date.
But traders say the yuan would be trading even stronger if the central bank was not keeping the market in check through its midpoint fixes, which have routinely proven more conservative than the market feels comfortable with.
Some market analysts believe the central bank should bow to market pressure by widening the trading band, while others say the dollar selling will subside soon and the central bank can afford to wait until China’s incoming leaders roll out more reforms.
Traders said they suspect that the central bank was intervening through major state banks to buy up dollars at the end of last week.
“There was a wave of dollar buying from major state-owned banks on Friday, but some traders suspected it was actually intervention from the PBOC to absorb dollars,” said a trader at a European bank in Shanghai.
Market participants offer different explanations for the yuan’s strength, which has continued despite the dollar’s gains against other currencies, reflected in the rise of the dollar index since mid-October.
Some market analysts believe Chinese corporate treasurers may be rebalancing their positions after going too long in dollars in the first half of the year.
Others say the dollar selling partly reflects an unexpectedly strong recovery in export growth, which hit a five-month high in October.