SHANGHAI: The yuan rose slightly on Wednesday as the dollar dropped in global markets overnight, and the yuan is expected to remain stable as both spot and forwards have factored in a steep slowdown in the world's second-largest economy.
The People's Bank of China fixed the yuan's midpoint higher and has recently kept its fixing slightly stronger than the currency's trading level, in a move market players believe is intended to fend off a flare-up of long-standing US allegations that the yuan is undervalued.
Onshore forwards fell to imply less yuan depreciation in the future -- in line with the rise in spot yuan rate but also due to an easing in money market conditions that have made banks borrow less yuan in the forward market.
Spot yuan was trading at 6.3540 per dollar at midday, strengthening slightly from Tuesday's close of 6.3562 after moving in a narrow range of only 41 pips.
Traders expect spot yuan to move mainly in a range of 6.35 to 6.37 against the dollar in the near term.
"Pressure for the yuan to depreciate has not yet dispersed but has eased greatly after the currency's falls earlier this year," said a trader at a Chinese commercial bank in Shanghai.
Before trading began, the PBOC fixed its daily midpoint at 6.3348, slightly stronger than Tuesday's 6.3418 to reflect the dollar's correction in global markets, but the rise in the fixing was less than the dollar's fall.
The dollar index fell 0.7 percent overnight then turned to range-bound trading on Tuesday, with investors waiting to see whether European policymakers will take action to stem the region's debt crisis.
FORWARDS ALSO REFLECT LIQUIDITY CONDITIONS
Benchmark onshore one-year dollar/yuan forwards changed hands at 6.4795, down 73 pips from Tuesday's close.
The forwards have jumped 1,641 pips so far this year on expectations of a yuan depreciation due to China's economic slowdown.
More recently, onshore forwards -- used by corporations to swap dollar contracts for cash yuan -- have also been affected by a Chinese money market squeeze, partly caused by the central bank's resistance to calls to do more to support the economy.
The PBOC fears such steps could reinflate property prices and aggravate industrial overcapacity, traders said.
On Tuesday, however, it did inject a huge 220 billion yuan ($35 billion) in short-term funds up to 14 days into the money market, offering temporary relief to the liquidity crunch.
Offshore one-year forwards, which are not affected by onshore yuan liquidity conditions, were trading at 6.4980 at midday, down a moderate 10 pips from Tuesday's close.
Strong dollar demand for much of 2012 has caused the yuan to fall this year, sinking by as much as 1.6 percent against the dollar in late July when the dollar index hit a two-year high.
But the yuan has regained some ground since then as dollar hoarding by Chinese companies slowed, leaving the yuan down 0.95 percent for the year to date.
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