Shanghai: Spot yuan ended up on the dollar on Thursday as the People’s Bank of China fixed a stronger mid-point after the Federal Reserve’s latest easing weakened the dollar globally, paving the way for a new round of yuan appreciation.
But the PBOC’s reference rate, from which the yuan can rise or fall 0.5% in a day, strengthened much less than the dollar’s weakening as the Chinese central bank appeared to be leaving some room for the yuan to appreciate in the future.
China faces a slew of political events in November, including a meeting between President Hu Jintao and his US counterpart Barack Obama on 11 Novvember at a Group of 20 summit in Seoul, which will add pressure for the yuan to appreciate on the dollar.
That has prompted China-based dealers to forecast the yuan will appreciate to around 6.6 per dollar by late November.
But potential for the yuan to rise beyond that level for the rest of this year will be limited as China is apparently cautious about the global economy and its impact on the country’s exports and employment.
After the Fed said on Wednesday that it would buy $600 billion more in Treasuries by the middle of next year in an attempt to reinvigorate a flagging recovery, the PBOC conducted mild open market operations on Thursday, indicating it does not intend to immediately further tighten China’s monetary policy.
The Chinese central bank kept the auction yield of its three-month bills unchanged on Thursday and is on course to drain only 0.5 billion yuan ($75 million) from the system this week, much less the that the market had expected.
“Overall, the PBOC will try to strike a balance between easing political pressure for the yuan to rise and keeping the yuan relatively stable amid uncertainties of the global economy,” said a senior trader at a North American bank in Shanghai.
The yuan closed at 6.6635 versus the dollar, up from Wednesday’s close of 6.6761. It has now risen 2.44% since its depegging to the dollar in mid-June.
The PBOC set the mid-point at 6.6708, a gain of 0.16% from Wednesday’s 6.6818 but lagging the 0.41% that the US dollar index lost on Wednesday.
Earlier, the central bank appeared to have made preparations for a fresh leg of yuan appreciation by setting a slew of weaker mid-points since 19 October when it raised official interest rates.
Traders said that by making the yuan trade either way and in a relatively wider range, Beijing can relieve domestic pressure by telling the Chinese audience that it is not yielding to external pressures to let the yuan appreciate.
Benchmark one-year dollar/yuan non-deliverable forwards (NDFs) fell to a more than one-week intraday low of 6.4045 bid from 6.4180 at Wednesday’s close, with their implied 12-month yuan appreciation rising to 4.16% from Wednesday’s 3.94% based on Thursday’s PBOC fixing.
Offshore forwards have generally tracked the trends of the PBOC’s mid-point and spot yuan recently.