SHANGHAI: China's yuan traded slightly stronger on Tuesday but will likely hold steady between 6.30 and 6.35 against the dollar in the weeks leading up to Vice Premier Xi Jinping's visit to the United States, traders and analysts say.
Spot yuan traded at 6.3136 at midday, 29 pips stronger than Monday's close, after the central bank set a slightly stronger mid-point in response to a small decline in the dollar overnight.
Traders expect the central bank to hold the yuan steady for the next several weeks, if not longer, as policymakers assess the magnitude and impact of a narrowing trade surplus and declining foreign exchange inflows [ID: ID:nL3E8CD0VP].
Following a decline in China's foreign exchange reserves in the fourth quarter of 2011 and three consecutive monthly declines in net foreign exchange purchases by the central bank and commercial banks, analysts believe the central bank has little appetite for further yuan appreciation in the short term.
"Three straight months of falling foreign exchange purchases have definitely weakened appreciation expectations for this year," said a trader at a foreign bank in Shanghai.
On the other hand, with Xi's visit to the United States to occur sometime in the next month -- though the date is not yet certain -- China is also unlikely to push down the yuan. The US typically voices its concerns about what it believes is an undervalued yuan at high-level meetings between the two countries.
Despite signs of foreign exchange outflows in recent data, market pressure still appears to be pushing the yuan to appreciate. Following several weeks in November and December during which the yuan closed weaker than the central bank's mid-point fixing, China's currency has closed stronger than the mid-point every day so far in 2012.
In the offshore non-deliverable market, one-year NDFs traded at 6.3150, implying 0.02 percent depreciation over the next year, compared to 0.008 percent appreciation implied at Monday's close.
In the offshore yuan market, spot CNH traded at a 0.12 percent premium to the onshore spot rate, compared to a 0.09 percent premium at Monday's close.
The yuan has now appreciated 8.1 percent since it was depegged in June 2010.
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