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Yuan breaks losing streak; signals appreciation tolerance

yuan-yuan-SHANGHAI: China's currency strengthened for the first time in a week on Wednesday after the central bank set a stronger fixing, which allowed the spot rate to respond to robust corporate demand for yuan.


The People's Bank of China's strong fixing of 6.2806 marked a return to its usual practice of setting a stronger midpoint in response to a fall in the dollar against other currencies overnight.


The PBOC had surprised the market with a series of weak fixings in recent days, despite weakness in the dollar. That pulled the spot rate weaker, even as traders reported healthy client demand for yuan.


But several traders had identified 6.2850 per dollar as a technical support level for the midpoint. When the fixing hit 6.2851 on Tuesday, several traders said that if it weakened further, that would indicate the PBOC's intention to guide the yuan on an extended weakening path.


Now, they say, the apparent rebound likely signals that authorities will allow the spot rate some space to appreciate over the next month, though they expect it will largely move sideways in the run-up to the Lunar New Year, which begins on Feb 9.


Although the midpoint is generally viewed as a policy signal, rather than the product of market forces, traders say policymakers at the PBOC are aware of key technical levels and strive to keep the midpoint consistent with technical principals.

Copyright Reuters, 2013


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