China's yuan stable, dollar funding costs ease after PBOC injection

SHANGHAI: China's yuan held steady on Wednesday, guided by the central bank, but a shortfall of dollars in the domestic currency market ahead of a long holiday kept dollar funding costs at high levels.

Spot yuan was trading at 6.0502 per dollar at midday, almost unchanged from 6.0505 at Tuesday's close after the People's Bank of China (PBOC) set its midpoint nearly flat at 6.1087, compared with Tuesday's 6.1066.

The central bank has used its midpoint fixing to keep spot yuan largely stable around 6.05 against the dollar since the start of the year, signalling the government's intention to keep the Chinese currency largely stable, traders said.

In the derivatives markets, one-year dollar funding costs implied in China's dollar/yuan forwards dropped slightly to 3.77 percent on Tuesday from 3.79 percent on Monday, which was its highest level since late 2011.

One-month dollar funding costs fell to 3.56 percent from 3.69 percent, but also remained at historically high levels, traders said.

Wednesday's data will be published late in the afternoon.

"Chinese companies typically need more dollars ahead of the Spring Festival to meet possible demand during the week-long holiday," said a dealer at a European bank in Shanghai.

"They partly sell yuan for dollars in the foreign exchange market to meet potential demand," she said. "But the central bank's tight liquidity stance in the Chinese money markets has added difficulties for dollar borrowers this year."

The Spring Festival, or Lunar New Year, starts on Jan. 31 this year, with the market closed for one week.

In China's money markets, the benchmark money rate slid on Wednesday after a generous injection by the PBOC the day before, as cash and better regulatory signalling soothed sentiment, but other rates rose in a sign of enduring caution.

The injection was the first intervention of the year by the central bank, and it came after short-term rates showed signs of spiking on Monday, risking a repetition of the destabilising cash crunches that repeatedly rattled investors in 2013.