The yuan rose to close at its highest level against the dollar in six weeks on Friday after the People's Bank of China set a stronger midpoint, continuing an upward crawl for the Chinese currency over the past few days. The yuan may appreciate a little in the near term as the central bank might use the exchange rate to fight potential imported inflation and as it needs to create a favourable environment for President Hu Jintao's visit to the United States in mid-January, traders said.
"During the Christmas and New Year holiday, we expect the spot yuan trade may move in a small range around the central bank's fixing," said a dealer at a Chinese bank in Shanghai. Spot yuan closed at 6.6270 versus the dollar, the highest close since November 11, up from Thursday's close of 6.6431. It has risen 3.0 percent since the PBOC announced a depegging of the two currencies in mid-June.
The central bank set the day's mid-point at 6.6371, the highest level since November 15 and up from Thursday's 6.6466. The mid-point is the level from which the yuan may rise or fall 0.5 percent against the dollar on a given day. Dealers said the yuan could appreciate 3 to 5 percent next year on a combination of political pressure and China needing to consider its own economic situation, such as inflation brought about through higher costs of imported goods and commodities.
The premium for yuan traded in Hong Kong rose to 170 pips over the mainland's spot rate on Friday, up from 20 pips at the close on Thursday. Hong Kong's central bank said on Thursday that it had fine-tuned its yuan trade settlement scheme to ensure stable development of the fast-growing offshore market for the Chinese currency.
Dealers said the move may increase demand for yuan in Hong Kong, while supply is still limited in the city, the prospect pushed up the yuan's value in Hong Kong. Offshore, one-year NDFs were bid at 6.5013, up slightly from Thursday's close of 6.4998, with their implied yuan appreciation in a year's time falling to 2.09 percent from 2.11 percent.
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