SHANGHAI: China's yuan stayed well clear of its top-end limit for the first time in nearly three weeks on Wednesday, as traders say forceful central bank intervention has restored dollar demand to the market and broken a six-week deadlock that had decimated trading volumes.
"Things won't go back to the way they were. The whole market knows that the central bank has bought a lot (of dollars)," said a trader at a commercial bank in Shanghai.
"Now the market is lacking in dollars. They've all been snapped up by the central bank. So a lot of people will start to store up dollars," he added.
Spot yuan held at 6.2455 to the dollar at midday on Wednesday. Volume was strong at $4.9 billion through midday.
The People's Bank of China (PBOC) has intervened sporadically in recent weeks when it appeared trading would otherwise grind to a halt.
It launched another such intervention on Monday, buying dollars aggressively amid an absence of other dollar bidders. But unlike previous efforts, Monday's action continued through all of Tuesday and probably involved far heavier dollar purchases, traders said.
That caused spot yuan to reach a six-week low close of 6.2460 on Tuesday, though it had touched weaker intraday levels during that period.
The PBOC set its midpoint at 6.2883 on Wednesday, mildly stronger than Tuesday's fix of 6.2906. That implied a top-end limit of 6.2254. The bank allows the exchange rate to rise or fall by no more than 1 percent from the midpoint it sets each morning.
Traders say now that the deadlock is broken, corporates who had been delaying dollar purchases will also likely return to the market. Many firms have dollar-denominated accounts payable due at year end, including China's state energy firms, who use dollars to pay for crude oil imports.
In a gauge of how previously entrenched expectations have been dislodged, one-year onshore swap points plummeted from 1,380 on Monday to a four-month low of 801 at midday Wednesday.
A decline in swap points indicate that dollar interest rates have risen relative to yuan interest rates, a sign that dollars have grown scarcer.
The PBOC's intervention this week has apparently occurred via state banks, which were seen buying aggressively on Monday afternoon and Tuesday.
Traders typically interpret such purchases as evidence that the central bank is acting through state banks to inject liquidity, though actual trades involving the central bank are invisible to the rest of the market.
Center>Copyright Reuters, 2012
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