China's yuan ended 2010 on a strong note, pushing past 6.59 per dollar on Friday to close the year up 3.6 percent and fanning hopes that it will see even more gains next year. The currency closed at 6.5897 per dollar, capping nine trading days that saw it rise 1.3 percent from a recent low and giving a decisive close to the year after the currency zig-zagged from mid-October to mid-December.
The yuan's strength came after the People's Bank of China (PBOC) set its mid-point at a record high for the second straight day, signalling the central bank may be engineering a fresh leg of yuan appreciation ahead of the visit by Chinese President Hu Jintao to the United States in mid-January.
But the central bank also sent a signal that coming rises in the yuan would not be drastic, as the fixing was just two pips higher than Thursday's. China-based traders expect the yuan to rise about 2 percent in the first quarter of 2011. For all of next year, it could gain around 6 percent as Beijing uses currency appreciation as a tool to fight consumer inflation, which hit a 28-month high in November, they said.
"There will be no linear appreciation, but zig-zags," said a senior trader at a US bank in Shanghai. "But overall, you can still see significant rises by the end of certain periods, with opportunities open for those who have good understanding of the complicated Chinese currency system." One of those opportunities could be in the first two weeks of the year, ahead of President Hu's US visit, some traders say.
While the Chinese government generally tries to paint a picture of resisting US pressure for yuan appreciation, in reality it often lets the currency strengthen ahead of major political events in recognition of the importance of the ties between the world's two biggest economies.
Dealers said offshore forwards , which imply yuan appreciation of less than 1 percent against the dollar in three months, are underestimating the yuan's potential and so present a window to short dollars in contracts out to one year.
Three-month one-year non-deliverable dollar/yuan forwards (NDFs) fell to 6.5657 in late trade from Thursday's 6.5670, implying yuan appreciation in three months' time of 0.87 percent. That's up from 0.85 percent but lags by far the 2 percent rise foreseen by onshore traders in the first quarter. Benchmark one-year NDFs were bid at 6.4318 from Thursday's close of 6.4508. Implied yuan appreciation in a year's time rose to 2.97 percent from 2.66 percent.
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