Yuan little changed

The yuan closed little changed against the dollar on Thursday after the People's Bank of China fixed a weaker mid-point in a sign that it has given up trying to let the currency rise more at the end of 2011 in the face of US pressure, traders said. They said the PBOC set a weaker mid-point in response to an overnight 0.9 percent rally in the US Dollar Index and after its record high mid-points on Wednesday and Thursday failed to reignite corporate interest in the currency.
The PBOC engineered a 0.5 percent rise in the last two weeks of 2010, making use of strong expectations of yuan appreciation at the time to help push the annual rise to 3.6 percent, partly to appease US critics of China's yuan policy. A similar tactics appears to have failed this year as many companies are reluctant to sell dollars on hand, believing the yuan has little room to appreciate sharply in coming months, with China's export growth slowing, traders said. "Thursday's mid-point implies that the PBOC may have decided to let the yuan's appreciation for 2011 to stay around the current level," said a dealer at a European bank in Shanghai. "A new peg for the yuan at 6.3/6.4 (versus the dollar) also appears to be in place now."
Many dealers said they believed the yuan would likely move in a narrow 6.3/6.4 range in the first few months of 2012 as China assesses the impact of global weakness on its economy and exports. Spot yuan closed at 6.3192 versus the dollar, compared with 6.3212 at the close on Wednesday, after the PBOC set the dollar/yuan mid-point at 6.3157, marginally weaker than Wednesday's 6.3146.
The yuan has appreciated 4.28 percent so far this year, and has risen 8.02 percent since June 2010 when the government abolished a two-year yuan/dollar peg of about 500 pips during the 2008 financial crisis. Until early November, a firmer yuan was a sure-fire bet as it edged higher on a combination of international pressure from its trade partners and as the government battled stubbornly high inflation at home, a risk to the country's political stability.
But there is now speculation that the yuan will depreciate in the near-term as China's exports are buffeted by recession in key economies though the longer-term uptrend remains intact. Offshore, benchmark one-year non-deliverable forwards (NDFs) rose to 6.3990 bid on Thursday against 6.3910 at the close on Wednesday, implying that the yuan will depreciate 1.30 percent in 12 months from Thursday's PBOC mid-point, compared with a 1.18 percent fall implied on Wednesday.