SHANGHAI: China's yuan rose slightly on Wednesday, as better than expected GDP data and a weaker dollar overnight prompted a stronger central bank mid-point.
The yuan traded around 6.3116 at midday, 34 pips stronger than Tuesday's close, after the central bank set the mid-point stronger at 6.3205.
Fears of a slowing economy had dampened expectations of yuan appreciation in recent weeks, as traders expected the central bank to hold the yuan steady in order to protect exporters amid weak external demand and lower-than-expected trade data growth in December.
But China's economy grew 8.9 percent in the fourth quarter last year, higher than 8.7 percent growth that economists had expected. Stronger growth could give Chinese policymakers more freedom to push further yuan appreciation this year, in an attempt to encourage domestic consumption.
Traders said the GDP data led to moderately stronger appreciation expectations on Tuesday and Wednesday.
But the trend was interrupted in early trading Wednesday, as two foreign banks -- apparently working in concert -- made large speculative dollar purchases, said a trader at a city commercial bank in Shanghai. Some other traders followed suit, hoping to ride the wave.
As a result, the yuan weakened slightly in early trading, as the dollar reached an intra-day high of 6.3183
But the market had shifted in the other direction by late morning, as customer demand for yuan pushed the rate back down, and the speculators were forced to cover their positions.
"Some people took the trade too far," said the trader, referring to the speculative bet against the yuan.
Even before the GDP figures, renewed appreciation pressure had been evident, as the yuan had strengthened from the mid-point fix every day this year.
Such pressure marked a shift from the last three months of 2011, when the yuan frequently closed weaker than the mid-point price.
Traders say this shift is the result of seasonal pressures. At the end of last year, demand for dollars was strong, as foreign companies converted yuan profits into dollars prior to re-patriation.
In the early days of 2012, however, traders are seeing increased demand from Chinese clients who want to convert dollars into yuan to pay for domestic spending and salaries in advance of the Lunar New Year holiday that begins this weekend.
In the offshore non-deliverable forward market, one-year NDFs traded at 6.2920 by midday, 110 pips stronger than Tuesday's close. The rate implied 0.31 percent appreciation over the next year, up from 0.19 percent appreciation implied at Tuesday's close.
The onshore spot rate has now risen 8.2 percent since it was depegged in June 2010.
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