SHANGHAI: The central bank set the yuan midpoint slightly weaker versus the dollar on Wednesday morning for the first time this week, while spot trade remained flat.
The People's Bank of China set the yuan midpoint at 6.3778 at market open, slightly weaker than Tuesday's fix. Spot prices, however, stayed flat and traded in an extremely tight range through midday.
Spot yuan opened at 6.3725, slightly softer than Tuesday's close, and was trading at 6.3680 in midday trade. The currency had yet to move outside a 20-point range by midday.
As a result of the weaker midpoint and the flat spot price, the gap between the two has narrowed, continuing a narrowing trend that began on July 20 when the spot price closed 623 pips away from the fixing, compared to 297 pips in midday trade on Wednesday.
Regulators widened the trading band -- the maximum spot prices are allowed to move away from the fixing -- to 1 percent from 0.5 percent in April.
Traders explain the spot yuan's newfound tendency to trade below the fixing in 2012 as indicating the state of market demand, as investors stock up on dollars.
The central bank, which once limited its operations to buying dollars, has become a dollar supplier to the market as Chinese corporates -- in particular oil companies -- attempt to replenish dollar reserves and hedge against further yuan depreciation.
In addition traders say the bank appears to have occasionally intervened to prevent the yuan from depreciating more abruptly.
Economists once widely agreed that the yuan would appreciate mildly this year, but the Greek debt crisis changed the equation by driving corporates and sovereigns to seek haven in dollars. The ensuing "dollar shortage" has pushed the dollar index up its basket of currencies, a basket dominated by the euro.
It has also complicated Beijing's currency strategy. Letting the currency trade more widely has allowed the yuan to exhibit two-way volatility, a key step toward allowing full internationalisation and convertability.
But the yuan continues to trade at decade highs against the euro, and Europe buys one-fifth of Chinese exports.
Traders now believe the yuan could depreciate a further 1 percent against the dollar in 2012. It has already slid around 1.4 percent.
Mainland banks have reported net yuan selling by clients in spot and forward markets, and this has been reflected by offshore forwards as well.
The one-year non-deliverable forward contract traded at 6.4235 at midday, a wide discount from spot prices, indicating both a difference in interest rates between Hong Kong and the mainland and expectations for yuan depreciation.
The offshore yuan spot (CNH) remains close to the onshore version, trading at 6.3720 at midday.
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