SHANGHAI: China's yuan closed flat against the dollar on Monday, with trading confined to a narrow range as the market eyes the euro for clues on whether the yuan will scale new heights this week.
After touching a series of record highs in the last two weeks, traders say the yuan's near-term trajectory now depends on the course of the euro. If the euro and other non-dollar currencies continue to strengthen against the dollar, the yuan could follow it upward to new historical highs.
Traders also believe the US election could persuade the PBOC to set somewhat stronger fixings in the coming weeks, but the effect is unlikely to override the impact of client demand and the trend in the dollar globally, as measured by the dollar index.
Spot yuan closed at 6.2547, little changed from Friday's close of 6.2538.
Before trade began, the central bank set its daily midpoint slightly weaker at 6.3071 per dollar, the second straight day of mildly weaker fixings following six straight days of stronger midpoints through last Thursday.
Traders largely dismissed speculation about the People's Bank of China (PBOC) intervening to support the yuan amid heated rhetoric in the US presidential campaign about China's alleged currency manipulation.
Instead, most believe corporate demand and the recovery of the euro following its mid-summer lows are responsible for the yuan's recent strength. The yuan touched its most recent all-time intraday high at 6.2446 last Thursday.
"In the previous month, the yuan had already appreciated by about 1,000 pips. At that point, there's no reason for the central bank to step in and cause even more appreciation," said a trader at Chinese joint stock bank in Shanghai, referring to the yuan's movement over the last two weeks.
Earlier in the year, when the yuan was depreciating, many corporates accumulated large long dollar positions. But when the yuan began to rebound, these clients faced pressure to sell dollars in order to avoid excessive losses on those positions.
"Before the yuan fell by too much, so there was some correction. Then after the yuan had already recovered by, say, 500 pips, these guys couldn't hold on anymore. So of course a lot of client orders appeared," the trader said.
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