SHANGHAI: China's yuan rose to three-week highs on Wednesday as traders questioned whether a third day of gains was a signal the central bank had switched its stance to gently supporting the currency after aggressively driving it lower this year.
Spot yuan changed hands at 6.2245 per dollar at midday on Wednesday, 0.02 percent higher than Tuesday's close. Earlier, the central bank had set its daily midpoint for the yuan 0.04 percent stronger, the biggest gain in the midpoint in four weeks.
That took gains this week to 0.6 percent. While small by the standards of freely floating currencies, it would equal the largest weekly gain for the tightly managed yuan since December 2011.
Traders have said that after pushing the yuan down in recent months, they think the People's Bank of China (PBOC) is now gently intervening to curb expectations of further losses.
"While it's clearly too early to tell if the there has been a definitive shift in terms of the PBOC bias around USD/CNY, the near-term risks suggest a continuation of this recent trend of CNY strength," Jonathan Cavenagh, currency strategist at Westpac Bank in Singapore, wrote in a note on Tuesday.
At the same time, some seasonal factors are helping, traders said. Yuan purchases are traditionally stronger at the start of each month, due to both corporate demand and position adjustments by dealers, and the US dollar is broadly weaker.
The yuan had fallen in each of first four months of 2014, and the cumulative loss of 3.3 percent more than reversed its gains of last year. It was the yuan's most sustained depreciation since its de-pegging from the dollar in 2005.
Traders and analysts widely believe the central bank engineered the weakness in a bid to punish speculators who regarded yuan appreciation as a sure bet.
TWO-WAY TRADE
"I can say with near certainty that the renminbi's depreciation in the first quarter was mainly the result of the central bank's intervention in the foreign exchange market," Yu Yongding, a former member of PBOC's monetary policy committee told state media in an interview, using the official name for the currency.
Yu, who is now a member of the Chinese Academy of Social Sciences, said it was "difficult to imagine" the yuan would fall more than 3 percent even as China's current and capital accounts were both in surplus during the period.
Market observers believe authorities are not aiming to move the yuan strongly in one direction or the other, but instead want to create the expectation of two-way trade as a way of discouraging excessive speculation.
The PBOC pledged on Tuesday to keep the yuan basically stable while pushing reforms to help introduce greater two-way flexibility in the currency.
One risk for the central bank was that if expectations of further losses became entrenched, it could lead to capital flight and affect domestic funding conditions.
"Overly fast depreciation is definitely something (authorities) don't want to see. In the medium term, I expect the yuan could fluctuate in the 6.20 to 6.26 range," said a trader at a mid-sized Chinese bank in Beijing.
In an opinion column published in state media on Tuesday, a senior official at China's foreign exchange regulator criticised Chinese companies for being poorly prepared to handle increased yuan volatility.
In March, the PBOC doubled the yuan's daily trading band from 1 percent to 2 percent on either side of the central parity rate that the PBOC publishes each morning.
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