Yuan closes below for first time in 2012

The yuan slumped on Friday, closing weaker than the central bank's fixing for the first time this year, reflecting increased demand for dollars at month's end and banks' desire to avoid holding short dollar positions across the holiday period. Spot yuan ended at 6.3390 per dollar, 223 pips weaker than Thursday's close and the biggest one-day fall since October 13 last year.
The yuan is now at its weakest point since December 22. It is also the first time since December 29 that the yuan closed weaker than the central bank's mid-point. With the Lunar New Year holiday beginning this weekend, Friday was effectively the third to last trading day of this month.
Demand for dollars is generally elevated near month's end, as import contracts frequently have month-end settlement dates. Given the expectation that the dollar would open higher after the holiday, banks were keen to avoid holding short dollar positions across the holiday period, traders said.
As a result, traders offered clients favourable rates for dollar purchases if clients would accept same-day settlement on spot transactions, rather than settlement one or two trading days later, as is customary. Banks were especially willing to exchange dollars for yuan, given tight yuan liquidity conditions and elevated yields in the interbank market.
"A lot of clients are taking the opportunity to buy foreign exchange today, because the price is lower," said a trader at a foreign bank in Shanghai, referring to discounts that banks are offering. After appreciating sharply in the last few days of 2011, the yuan fell back in early January and has traded in a narrow range around 6.31 - 6.32 this month, as the central bank has aimed to keep the exchange rate basically stable on uncertainty about a slowing economy and weakening foreign demand.
In the offshore non-deliverable forward market, one-year NDFs traded at 6.2870 late Friday, implying 0.47 appreciation over the next year, compared with 0.55 percent at Thursday's close. The yuan has now appreciated 8.1 percent since it was de-pegged in June 2010.