SHANGHAI: China's yuan dropped against the dollar for the second session on Tuesday, dashing hopes of those who saw a brief series of high guidance rates last week as signalling the way for a wider rally in the market, traders said.
"The market has taken cues from the PBOC's recent midpoints, and no one is quoting the yuan at prices indicating expectations of further rises," said a trader at a European bank in Shanghai.
Spot yuan stood at 6.2303 per dollar at midday, down 0.09 percent from Monday's close even after the PBOC fixed its midpoint at 6.1529, or a 0.01 percent gain from Monday.
The central bank guided the yuan to depreciate by as much as 3.4 percent earlier this year to deter speculators betting on non-stop yuan appreciation.
More recently, however, the yuan has staged a comeback, with a rise of 0.6 percent last week, reflecting renewed optimism in the domestic market after China recorded its biggest foreign trade surplus in five years in May, at $35.9 billion.
The PBOC, which issued a handful of strong midpoints around the release of the trade data on May 8, has been quick to act to dampen renewed speculation on yuan rises by reversing to fix a number of weaker official rates since the middle of last week.
The mixed signals have raised questions about its motives.
"Whatever the doubt, one thing is certain: there is a rough balance of dollar supply and demand in the market for now," said a dealer at a Chinese commercial bank in Shanghai.
"The heavy inflows from trade surplus in May have been offset by seasonal corporate demand in June as well as the fact that companies now tend to retain more dollars on hand."
June is typically a peak month of dollar demand in the domestic market as companies buy dollars to prepare for paying half-year dividends to their shareholders, trader say.
And despite the strong trade surplus in May, Chinese banks posted a surplus of only $6.8 billion in their foreign exchange settlements for their clients in May, the smallest in 10 months and the fourth straight month of falls.
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