Yuan edges higher, central bank seen preventing major appreciation

SHANGHAI: Corporate demand helped the yuan edge higher against the dollar on Monday morning, despite apparent efforts by the central bank to keep the Chinese currency in check, traders said.

The yuan traded at 6.2282 per dollar at midday in heavy trading, 0.03 percent stronger than Friday's close of 6.2303.

The central bank set its midpoint at 6.2872 on Friday, a shade stronger than Friday's fix of 6.2897.

The People's Bank of China (PBOC) allows the exchange rate to rise or fall 1 percent from the midpoint it sets each morning.

Traders are wary of predicting the yuan's movements in 2013, but most expect the yuan to remain relatively stable, after it appreciated by 1 percent in 2012.

The PBOC's recent midpoints have clearly signalled a preference for stability, with the daily fixes confined to a range of less than 100 pips since the beginning of December.

And apparent intervention by the central bank has stifled pressure created by corporate demand for the yuan to appreciate.

The yuan hit the top-end limit of its daily trading band nearly every day in November and early December. That created a deadlock which trading volume evaporated as dollar bids were absent from the market.

The deadlock was broken when major state banks -- apparently acting on behalf of the PBOC -- stepped in to buy dollars. That restored liquidity to the market but left traders wondering if the market could sustain normal functioning without central bank support.

Traders say that major state banks are still apparently serving as dollar buyers of last resort, even as corporate clients continue to demand more yuan than dollars.

But these banks have kept their dollar purchases moderate, apparently content to keep the exchange rate around its current level rather than acting aggressively to pull the yuan weaker.

"Without the big banks, the market price would probably be around 6.20," said a trader at a Chinese joint-stock bank in Shanghai.

Offshore yuan traded at 6.2130 near midday, 0.25 percent firmer than onshore spot. CNH has traded at a premium since late November, after the two rates stayed close together for most of 2012.

Traders and analysts say the CNH premium reflects expectations for further appreciation of onshore spot as well as recent tight CNH liquidity in the offshore yuan money market.

Center>Copyright Reuters, 2013