Yuan near record high

The yuan closed up against the dollar and approached its record trading high on Wednesday after the People's Bank of China fixed its daily mid-point near an all-time high. The PBOC has fixed a slew of record high mid-points since the start of this year, indicating the government may be allowing the yuan's exchange rate to appreciate to help fight inflation, partly propelled by high global commodity prices.
China is also in the early stages of an economic rebalancing act that makes a stronger currency an almost inevitable part of the mix, implying sustained yuan appreciation may come far sooner than many foreign players are expecting. "All signs point to more gains of the yuan's exchange rate in the coming months, although the PBOC appears to remain cautious and is controlling the pace of appreciation," said a dealer at a major Chinese state-owned bank in Beijing.
The trader and several others expected the PBOC to let its fixing hit another record high late this week or early week. The yuan closed at 6.5559 versus the dollar, up from Tuesday's close of 6.5610 and within arm's reach of its record trading high of 6.5549 hit last Friday. It has now risen 4.12 percent since it was depegged in June 2010, and 0.51 percent so far this year. Before trading began, the PBOC fixed the yuan's mid-point at 6.5586, stronger than Tuesday's 6.5625 and only six pips away from the fixing's record high of 6.5580.
Offshore, benchmark one-year dollar/yuan non-deliverable forwards were bid at 6.4380 in late trade, down from 6.4480 at Tuesday's close. Their implied yuan appreciation in a year's time inched higher to 1.87 percent from 1.72 percent. Since the start of this year, NDF-implied yuan appreciation has persistently lagged market expectations of a 5 to 6 percent rise in 2011 partly because hedge funds, the main players in forwards, cut back exposure to Asian markets in favour of dollar assets as the US economy recovers, traders said.