Yuan declines

The yuan closed down against the dollar on Monday despite the Chinese central bank setting a relatively high mid-point to deflect market speculation of yuan depreciation, traders said. The relatively high mid-point setting meant the yuan easily hit the weaker limit of its daily trading band. Dealers said decent dollar demand in the domestic market amid global dollar strength also caused the yuan to weaken.
"The central bank's intention for now is to halt expectations of yuan depreciation in the offshore and onshore market," a dealer at a Chinese commercial bank in Shanghai said. Beijing seems to be wary of sharp yuan appreciation 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. The People's Bank of China will not let the Chinese currency depreciate to any large extent as some official data has already shown signs of a possible capital outflow, Chinese bank dealers said. Spot yuan closed at 6.3641 versus the dollar, weaker than Friday's close of 6.3597. It has still risen 3.54 percent so far this year and 7.26 percent since its depegging in June 2010.
Before trading began, the PBOC fixed the day's mid-point at 6.3349, slightly down from Friday's 6.3310. 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 6.3810 on Monday against 6.3780 at the close on Friday, implying that the yuan would depreciate 0.73 percent in 12 months from Monday's PBOC mid-point, compared with a 0.68 percent fall implied on Friday.