HONG KONG: China's yuan pulled back on Wednesday after the central bank tempered the brisk pace of gains via a weaker daily midpoint fixing, setting it up to break a three-day rising streak.
The weaker fix comes a day after state-run banks were spotted buying dollars at the day's highs on Tuesday pushing the gap between the offshore yuan and its onshore counterpart to more than 200 pips, its highest since November.
In early trades on Wednesday, the yuan was trading at 6.0438 per dollar, slightly weaker than Tuesday's close of 6.0412. The People's Bank of China fixed the daily currency midpoint at 6.1005 per dollar.
The Chinese currency has extended its strong performance against the greenback in the opening days of 2014 by gaining 0.2 percent against the dollar after a solid 2.9 percent rise in 2013.
But the Chinese currency's strong performance is at odds with the state of the economy. Latest manufacturing surveys are trending well below the global average and the services sector has shown a lack of momentum.
Exports have remained lackluster and the latest data for bank lending showed a distinct slowdown for new bank loans.
But in the offshore market for the Chinese currency, investors showed no signs of fatigue with demand strong for the "CNH" as it is widely known.
Offshore yuan has hit a series of record highs in recent days opening up a wide gap between the onshore and the offshore market and prompted a bunch of companies to tap the offshore bond market for fresh funds.
"There is somewhat of a seasonal bid to CNH in the early January periods of the past few years, on the back of structured product demand and corporate involvement," said Sacha Tihanyi, a currency strategist at Scotiabank in Hong Kong.
Notwithstanding the element of seasonality in the current phase of the yuan's strength in the offshore market, concerns over a lingering squeeze in the onshore money market at the end of 2013 have eased considerably, boosting sentiment.
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