SHANGHAI: The yuan traded flat on Friday morning after the central bank held its midpoint unchanged, signaling its commitment to keeping the currency steady in spite of market forces pushing for appreciation.
The yuan opened exactly where it closed on Thursday - at 6.2263 versus the dollar, the strongest level permitted by the central bank's midpoint - and stayed there through the morning, apart from a few trades.
Friday's midpoint was 6.2892, unchanged from Thursday's fix.
The People's Bank of China (PBOC) allows the exchange rate to rise or fall 1 percent from the midpoint it sets each morning.
Trading volumes have suffered in recent weeks as would-be dollar buyers have stayed out of the market in expectation that the yuan will rise further.
Yet the PBOC has not intervened in the market to provide yuan liquidity, surprising some market participants.
The PBOC's decision not to intervene directly, even as its 1 percent daily trading band remains in place, has created deadlock in the market.
AN END TO THE YUAN RALLY?
In a guest column for Reuters Chinese News published on Thursday, Fu Qing, head of FX trading in China for Standard Chartered, said that while a resurgent trade surplus in recent months and signs of recovery in the macro-economy were important factors supporting the yuan's rally, a "herd effect" is also driving the market.
"The reason the yuan is continuously rising recently is mainly because the market yuan hit its top-side limit multiple times, which provoked panicked (yuan) buying by some companies, creating a vicious cycle," he wrote.
In the first half of 2012, the yuan weakened. Around mid-year, some banks were telling corporate clients that the yuan could fall to as low as 6.5 to 6.6, Fu said. That caused corporates with dollars on hand to delay trading them for yuan.
But an abrupt reversal caught many firms off guard. The yuan hit a 2012 low point of 6.3967 in late July but has since recovered by 2.7 percent. It has gained 1.1 percent against the dollar this year.
Fu believes the yuan rally is likely to lose steam early next year. He pointed out that medium- to long-term onshore forwards are currently priced very close to the level implied by interest-rate parity. That means appreciation expectations are having a minimal impact.
He also pointed to data from the State Administration of Foreign Exchange showing that while corporate yuan purchases exceeded dollar purchases in recent months, the volume of yuan purchases was still well below China's trade surplus.
That means corporates are still not converting all of their FX receipts into yuan, even as the Chinese currency appears to be on a clear appreciation path.
That contrasts with the pattern of previous years, when entrenched yuan appreciation expectations caused corporate yuan buying far in excess of the trade surplus. Such excess yuan purchases allowed companies to profit from the one-way bet on appreciation.
Fu said the central bank has greatly reduced its direct interventions in the market this year and is determined to maintain that hands-off stance, preferring to let the market sort out the supply/demand balance on its own.
If the bank intervened now to provide yuan liquidity - effectively intervening to weaken the currency - that would create the expectation that if the yuan again begins to depreciate, the bank would again step in, he said, this time to inject dollars.