Yuan rises on record high fixing, dollar demand limits rises

SHANGHAI: The yuan rose slightly against the dollar on Friday after the People's Bank of China set the mid-point at a record high in the wake of a Group of 20 meeting in France pushing for greater exchange rate flexibility.

But the yuan hovered around the weaker end of its daily trading limit as the dollar continued to be in short supply.

"Dollar demand is really strong these days. Many banks are begging for dollars," said a dealer at a Chinese bank in Shanghai. "It seems the central bank has no intention to help market liquidity, so spot yuan just traded near the weaker limit."

Dealers said the relatively wide spread between offshore and onshore yuan was a key reason for strong dollar demand.

It had opened up opportunities for traders to buy dollars in the domestic market and sell them in Hong Kong, while the offshore yuan has remained weaker than the onshore Chinese exchange rate for longer than a month.

The spread is around 470 pips, between offshore yuan , at 6.3950 and spot yuan , at 6.3481. The yuan closed at 6.3514 on Thursday.

It has risen 3.80 percent so far this year and 7.53 percent since it was depegged from the dollar in June 2010.

Before trading began, the PBOC set the mid-point at 6.3165, the highest level since the 2005 revaluation. The central bank uses the fixing to signal the government's intentions for the yuan.

Capital Economics said in its research report that they do expect the yuan's pace of appreciation against the dollar to slow slightly, from the annualised 5 percent rate seen so far this year to a 3-4 percent rate between now and the end of 2012.

Offshore, one-year dollar/yuan non-deliverable forwards (NDFs) were bid at 6.3675 by midday, down from 6.3570 at the close on Thursday.  They implied yuan depreciation of 0.80 percent in 12 months from Friday's PBOC mid-point, compared with depreciation of 0.64 percent they implied on Thursday.

Copyright Reuters, 2010