SHANGHAI: China's central bank set the yuan official exchange rate at a slightly stronger level on Thursday, but the spot market remained locked in a narrow range as it has all week.
Rumours that the United States and China are preparing to ease monetary policies to spur growth continue to circulate, but Beijing and Washington remain cagey on their plans.
In fact, the central bank drained liquidity for the second consecutive week on Thursday and raised a key money rate.
"This sends a negative signal to the market as it appears to be policy tightening at a time when the buzz has all been about easing," wrote Dariusz Kowalczyk, economist at Credit Agricole CIB, in a research note, adding that the development should put upward pressure on yuan spot prices.
However, the spot yuan had yet to firm by midday trade, weakening mildly instead to 6.3702 from 6.3690 at the open. Spot yuan continues to trade far weaker than the central bank fixing, set at 6.3126, which compared with a previous fixing at 6.3140.
A trader at a joint-stock bank in Shanghai said he expects the yuan to strengthen in afternoon trade.
Traders told Reuters the central bank has used the midpoint to signal the market that it will not let the yuan slide below 6.4 against the dollar, which it fears could lead to destabilising capital outflows.
The dollar index, which the central bank frequently consults when setting the midpoint, strengthened slightly in overnight trade but was on its way back up at noon. The index hit a two-year high against its trading basket -- which is dominated by the euro -- on July 12, and has remained in the neighborhood since.
The yuan continues to trade at a decade-high against the euro, causing a headache for Chinese exporters as overall growth slows.
OFFSHORE MARKETS
Offshore yuan markets also remain flat. Non-deliverable one-year forward contracts (NDFs) traded in Hong Kong at 6.4105 at noon, implying depreciation of around 0.6 percent in one year.
Most economists expect the yuan to appreciate against the dollar this year. Analysts said that differing interest rates in Hong Kong and the mainland help explain why the NDFs appear to be predicting devaluation.
Offshore yuan deposit exchange rates remained tightly bound to the onshore rate at 6.3695.
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