SHANGHAI: China's yuan hit a record high against the dollar for a second straight day on Thursday, with traders citing central bank intervention and short-term hedging trades for the rise.
Few market participants, however, believe that present gains signalled the beginning of another sustained rally in the currency's value, even after China's stronger-than-expected export performance in July.
"Trading was light over these two days, meaning there is not an overwhelming trend for the yuan to appreciate," said a dealer at a foreign bank in Shanghai.
"That implies the invisible hand of the PBOC," he said. "With the G20 summit drawing near, the yuan is very likely to stage another round of mild appreciation in line with China's long-standing practice of letting the yuan rise ahead of major political events."
Patrick Wu, head of trading for China at JP Morgan Chase in Shanghai, said the rise was mostly due to traders hedging short yuan positions. The trend may not be sustained given the central bank's general commitment to exchange rate stability, he said.
Other traders concurred, arguing that the yuan breaking through a psychological resistance point of 6.12 on Wednesday had forced traders to get out of more aggressive positions.
"Firms typically need to offset some dollar positions if the yuan breaks through a psychological barrier, and Wednesday's breach at 6.12 sparked liquidation today," said a dealer at a Chinese commercial bank in Shanghai.
"As such, you can still not be certain that the yuan has entered a round of appreciation by today's record highs."
Spot yuan struck a series of all-time highs on Thursday morning, hitting an intra-day peak of 6.1159 versus the dollar in early afternoon, its highest level since the Chinese foreign currency market was created in 1994, and up 0.05 percent from Wednesday's close.
The yuan has gained 1.87 percent so far this year, bucking a weak trend in emerging market currencies, but the bulk of its gains were logged in April and May.
It has flattened out since and economists and traders have speculated that the central bank would move to stabilise the exchange rate, or even force a mild depreciation, after surprisingly weak export data in June.
But data on Thursday showed Chinese exports improved slightly in July, boosting sentiment -- but imports also strengthened, diminishing the trade surplus for the month. Traders said the more upbeat data cannot support a sustained rally in the yuan.
"If the yuan continues hitting record highs despite the moderate trade data for July, it will be clear that the central bank is engineering another round of appreciation," said a dealer at a European bank in Shanghai.
However, as Wu of JP Morgan Chase and other traders pointed out, the PBOC appears to be still signalling that it wants stability, if its official midpoint rate is any guide.
The central bank set its official midpoint at 6.1703 on Thursday, up 0.04 percent from Wednesday's fix, a level traders said only reflected the dollar's global weakness and gave no hint of guidance from the PBOC.
The spot rate is only allowed to rise or fall by 1 percent from the midpoint on any given day. It was 0.87 percent stronger than the the midpoint at midday, which ordinarily indicates the market is more bullish than the central bank.
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