Yuan rides high as central bank reverses course to stem depreciation

SHANGHAI: China's yuan hit its strongest point in two weeks on Tuesday, as traders detected signs of central bank intervention to support the currency after it touched an 18-month low last week.

Spot yuan hit its strongest level since April 22 in early trade, changing hands at 6.2330 at midday, a gain of 0.20 percent from Monday's close following its 0.22 percent gain on Monday, the biggest in four weeks.

Traders said they saw initial signs that the People's Bank of China (PBOC) was selling dollars to support the yuan last Wednesday, when the yuan hit an 18-month low of 6.2676.

"The 6.265 level was a key barrier. When it crossed, the central bank dumped a large amount of dollars into the market as a form of counter-directional intervention," said a trader at a city-level Chinese commercial bank in Shanghai.

"They seemed to be sending a message to corporates to say, 'It's time to halt your dollar buying.'"

Traders can't directly observe central bank intervention, but the generally interpret large and unusual purchases by big state-owned banks as a sign of the PBOC's hand in the market.

Corporates had been buying dollars aggressively in recent weeks as depreciation expectations took hold and firms scrambled to unwind long yuan positions accumulated when appreciation was viewed as a sure bet.

Traders now say the yuan is due for a mild rebound after fourth straight months of losses. China's persistent monthly trade surpluses still provide fundamental support for appreciation.

Bank of America-Merrill Lynch forecast on Monday that yuan appreciation will reassert itself in the second half, with the currency closing 2014 at 6.10.

Previously the central bank was seen intervening to weaken the yuan in February and March as a means to punish speculators. The PBOC was concerned about punters skirting China's capital controls to bring foreign currency into the country and profit from expected yuan appreciation.

With that mission largely achieved, traders say the yuan could strengthen to 6.21 per dollar in coming weeks.

That would still leave the yuan clearly weaker than its all-time high of 6.0430 touched in early January but could serve to calm fears of runaway depreciation and capital flight stoked by the yuan's recent weakness.