SHANGHAI: The central bank set the dollar/yuan midpoint weaker for the third day in a row on Thursday, with spot yuan also pulling away from a five-month high hit on Wednesday.
Dealers and customers had moved to cover short positions in advance of the upcoming holiday, traders said, but Thursday trading saw a slowdown in dollar-selling as the dollar index moved upward in overnight trade.
The People's Bank of China (PBOC) fixed the yuan midpoint at 6.3459 prior to the market open, slightly weaker than Wednesday's fixing of 6.3443.
Spot prices opened at 6.3050 and stayed nearby in midday trade, trading in a narrow band between 6.3084 and 6.3033.
This is the first day this week that spot prices have followed the midpoint instead of moving away from it.
Spot yuan closed 0.7 percent stronger than the fix on Wednesday, the yuan's widest strong-side divergence from the fix since the central bank doubled the yuan's daily trading band from 0.5 percent to 1 percent in April, but the spot spread narrowed slightly on Thursday.
Traders have different theories as to why spot prices have moved up so strongly. One is that corporate customers - in particular oil companies - prefer to stock up on dollars before holidays, which would ordinarily cause the yuan to weaken.
But traders said the Bank of China (BoC) had been dumping massive amounts of dollars into the market on Wednesday, pushing the yuan up and away from the midpoint.
On Thursday, banks returned to buy dollars, a trader at a major Chinese bank said. He and other traders said they believe the yuan will move between 6.30 and 6.31 for the rest of the week.
Forwards contracts moved away from the spot price on Thursday, extending a widening trend in average spreads.
Offshore one-year non-deliverable forward contracts changed hands at 6.4168. Onshore deliverables of the same tenor were trading at 6.4563.
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