SHANGHAI: China's yuan edged down on Monday, guided by a weaker midpoint from the central bank, even as data indicates strong corporate demand for the currency remained robust.
The People's Bank of China (PBOC) set a weaker midpoint on Monday after the dollar index rose overnight on Friday.
Spot yuan touched a record high of 6.1723 per dollar last Wednesday when the central bank set its midpoint at its strongest level ever at 6.2342. At its current level, the spot rate is still only 0.14 percent weaker than that record.
The series of strong midpoints leading up to last Wednesday surprised the market, and traders held different views on the PBOC's motivations.
Following remarks from two central bank officials last week, speculation ticked up that the PBOC was preparing to widen the spot rate's daily trading band to 2 percent above or below the midpoint, up from the current 1 percent.
Some traders believed that by using stronger midpoints to guide the spot rate stronger, the PBOC was attempting to release some appreciation pressure in advance of the band widening, in order to prevent an abrupt one-off rise in the currency once the widening occurred.
The spot rate has been trading near the top edge of its trading band since last September, indicating that the midpoint has been acting as a restraint on appreciation.
Other said the PBOC was responding to weakness in the Japanese yen and other Asian currencies.
Regardless of the reason, the stronger fixes have served to accommodate what traders say is strong client demand for yuan.
Data out late last week indicated that Chinese corporates are accumulating long yuan positions. Chinese corporates still bought $44.6 billion more in yuan from banks than they bought in foreign exchange in March.
The surplus yuan buying came despite China running a small trade deficit in March.
Ordinarily, a trade deficit should reduce net yuan purchases by Chinese corporates, since a deficit means that exporters received less foreign currency as payment - which they normally sell to banks in exchange for local currency - than the amount of forex that importers would be expected to buy from banks in order to pay for foreign goods.
But if corporates are expecting the yuan to appreciate, exporters may raise the portion of their foreign currency receipts that they choose to convert into yuan, while importers may reduce the portion of their overseas purchases that they finance through the purchase of foreign exchange.
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