SHANGHAI: The yuan closed flat on Tuesday after rising in morning trading as traders took advantage of a weaker dollar index in the afternoon.
The People's Bank of China (PBOC) has fixed the yuan midpoint at successively stronger levels for the last three trading days, after the yuan set a record decline against the dollar in May.
But spot prices have stubbornly resisted stronger guidance as markets wait for signs of direction from Europe. The yuan hit its highest level against the euro since early 2002 in late May.
The euro finally rallied on Tuesday on reports that Europe may be moving closer to fiscal integration and to reports that the G20 is expected to pressure Germany to moderate proposed austerity measures directed at Greece and other struggling economies in southern Europe.
The rally led to a decline in the dollar index, a currency basket dominated by the euro, which the PBOC usually uses as a reference when setting the yuan's midpoint. This caused the yuan to strengthen slightly by midday, but the trend was not sustained.
However, the Chinese currency remains near a historical high against the euro, which is complicating Beijing's efforts to stimulate its economy after a series of lacklustre domestic economic indicators rattled markets.
Europe accounts for more than a fifth of Chinese exports -around 16 percent if the United Kingdom is excluded - which some analysts say has given the PBOC an incentive to push the yuan down slightly against the dollar, so as to prevent it from rising further against the euro.
Economists are divided as to whether the PBOC is using the midpoint to support the export sector. Dariusz Kowalczyk, economist at Credit Agricole CIB, wrote in a research note on Tuesday that the yuan's nominal effective exchange rate (NEER) actually declined on Tuesday.
"In trade-weighted terms, the fixing was down by 0.25 percent - the first NEER decline in two weeks and the biggest since late February. The PBOC may be trying to steer the trade-weighted value of the CNY down to protect the interests of exporters," he wrote.
But Perry Kojodjojo, FX strategist at HSBC, said Beijing had not yet turned to currency policy to support Chinese exports.
"There is no doubt that China is worried about the European issue," he said. "But I don't think FX is their first point of attack to support exports. They have done other measures such as reducing taxes on the export sector, but they are also allowing the currency to adjust to react to the situation in global markets."
The yuan was fixed at 6.3225 in the morning, but spot prices continued their custom of trading far below the midpoint, as they have consistently done since mid-March. However, volatility tightened further on Tuesday, trading in a range between 6.3625 and 6.3584 by midday. The yuan closed at 6.3675, 35 pips weaker from Friday's close.
A trader at a Chinese bank told Reuters that the central bank was using stronger fixings to signal that it will not allow the yuan to dive further or more quickly. The signal has caused yuan trade to level off.
Yuan 1-year non-deliverable forwards also strengthened slightly, implying depreciation of around 0.5 percent.
The offshore yuan (CNH) continued to track the onshore yuan but maintained its trend of trading slightly weaker than the onshore spot, which may be related to tightening liquidity in the CNH market. The supply of offshore yuan continued to contract in April, and has now shrunk for five consecutive months.
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