HONG KONG: China's yuan crept higher on Tuesday after the central bank fixed the daily midpoint just below a recent record, but investors were wary of purchasing the Chinese currency before a key US central bank meeting this week.
Global markets are on the watch for when the Federal Reserve will start to reduce its $85 billion-a-month bond-buying programme, a major driver of global risk assets in recent years.
While a majority of economists expect the so-called "taper" to happen in March, a recent run of upbeat economic data has steadily shortened the odds on an announcement at this week's two-day meeting concluding on Wednesday -- or in January.
That has prompted traders to reduce their long yuan positions after a burst of strength in the opening days of December, with investors dialing down their expectations for renminbi gains next year after a chunky 2.6 percent rise against the greenback this year.
On Tuesday, the Chinese yuan, also known as the renminbi, was a shade stronger at 6.0714 per dollar compared with 6.0715 at the previous close. It hit a record high of 6.0703 per dollar last Tuesday, guided by a spate of strong fixings by the People's Bank of China.
Tuesday's fixing at 6.1108 per dollar was just a few pips away from a record 6.1100 per dollar last Wednesday.
Deutsche Bank strategists believe yuan appreciation will persist next year in spite of a likely stronger dollar environment though a number of macro risks could trigger sizeable outflows and could end up keeping the currency on a leash.
Most long yuan trade bets are increasingly executed through the offshore yuan traded in Hong Kong or the "CNH" market, as it is widely known, with investors betting via the increasingly liquid spot and forwards markets.
Those bets typically rise before expectations of one-off events such as currency revaluations and more recently last month when the offshore yuan traded at a substantial premium to its onshore cousin.
Conversely, the European debt crisis and concerns of a blowup in Chinese bad loans earlier this year pushed the CNH to a discount to the onshore market in September 2011 and in June this year.
Daily liquidity in the offshore yuan market is about $5-7 billion including spot and forwards, and market watchers expect this to rise to more than $10 billion next year.
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