BEIJING/SHANGHAI: The yuan edged up slightly against the dollar on Friday afternoon but touched the lower end of its daily trading band, underlining strong market demand for the US currency.
Despite the central bank's efforts to keep the yuan stable through the setting of its daily mid-point, a shortage of dollars onshore amid broad dollar strength in global markets has prompted the Chinese currency to trade lower than the daily reference rate -- a situation traders said could persist.
"Dollar liquidity is still quite tight in the market and companies and banks are showing rising demand for buying dollars and few would like to sell dollars at this time unless they have to do so," said a trader at a state bank in Shanghai.
Beijing seems to be wary of sharp yuan fluctuations amid weak external demand and financial market turmoil caused mainly by the euro zone debt crisis, and will likely keep the currency stable for the rest of this year, traders said.
But the PBOC has also acted to limit how much the yuan can fall by setting a slew of relatively stable mid-points.
"It seems that the market is moving a bit far from what the central bank wants to see and such a trend may continue, if it keeps setting a higher-than-expected mid-point," said a trader at another state bank in Beijing.
Traders said that the euro debt woes and other uncertainties hanging over the global economy may also delay yuan appreciation.
The dollar versus yuan exchange rate may rise or fall 0.5 percent from the mid-point each day.
Spot yuan was at 6.3627 versus the dollar, slightly stronger than Thursday's close of 6.3635. It has risen 3.57 percent so far this year and 7.28 percent since its depegging in June 2010.
Before trading began, the PBOC fixed the day's mid-point at 6.3310, up from Thursday's 6.3353. The central bank uses the fixing to express the government's intention for the yuan's daily movement.
Benchmark offshore one-year dollar/yuan non-deliverable forwards (NDFs) have largely been forecasting yuan depreciation in a year's time since late September, reversing a trend of appreciation since the yuan's revaluation in July 2005.
One-year NDFs were bid at 6.3850 on Friday against 6.3820 at the close on Thursday, implying that the yuan would depreciate 0.85 percent in 12 months from Friday's PBOC mid-point, compared with a 0.73 percent fall implied on Thursday.
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