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Yuan closes flat; deadlock persists as central bank thwarts appreciation

yuan-SHANGHAI: China's currency was flat on Thursday, extending the weeks-long deadlock between market forces pushing for appreciation and the central bank's determination to hold the yuan steady.


The spot rate ended the day exactly where it was at midday - 6.2281 per dollar - and nearly unchanged from Wednesday's close of 6.2273.


The 6.2281 level was the strongest permitted by the central bank based on Thursday's midpoint of 6.2910, marginally weaker than Wednesday's fix of 6.2902.


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


In recent weeks, the PBOC has held its midpoints resolutely steady, despite market pressure for yuan appreciation. That has created a deadlock in which the yuan has hit its top-end limit for six straight sessions and 23 of the last 26.


Trading volumes have suffered, as would-be dollar buyers don't want to do transactions at the price available. Average daily turnover has plunged from $13.9 billion in the first three quarters of the year to less than $6 billion in the last five sessions.


Unless there's an upsurge of dollar demand, the deadlock looks set to persist until the central bank either injects more yuan liquidity into the market or else strengthens its midpoints to grant the currency more room to appreciate.


Traders say the current pattern could last until year's end.


With pricing restricted in the spot market, some corporates are now shifting to short-term forwards, which are not subject to the 1 percent trading band.


Overnight forward yuan is now being quoted at a slight premium to the spot rate, even as longer-term forwards continue to trade at a discount.


That indicates that yuan buyers are willing to pay more for yuan in three days' time - when one-day forwards settle - than for spot yuan, for which trades are settled in two days.


Pressure for the yuan to appreciate has come from efforts by companies to unwind long yuan positions accumulated earlier in the year, when the yuan was weakening amid a slowing Chinese economy and safe-haven demand for dollars, thanks to concerns about the eurozone debt crisis.


But the yuan has recovered by 2.7 percent since hitting a 2012 low of 6.3967 in late July, and corporates are eager to reduce dollar holdings based on expectations that this trend may continue.


The yuan has now risen 1.1 percent in 2012.


Copyright Reuters, 2012


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