SHANGHAI: The yuan advanced on Friday morning, buoyed by strong corporate demand and tight money market conditions, with traders saying the Chinese currency could test the key resistance level of 6.30 to the dollar this week.
Dealers expect a strong yuan demand in the run-up to the October holiday and the end of the third quarter, with firms requiring cash to pay bonuses and dividends.
The same seasonal factors have also pushed China's short-term money market rates to seven-month highs, as banks cut back on interbank lending to preserve liquidity in expectation of holiday cash demand and quarterly regulatory assessments.
Tight yuan liquidity raises the cost of swaps used to funding short yuan positions overnight, pumping up demand for the Chinese unit as traders try to close out those positions within the trading day.
Spot yuan gained 30 pips to 6.3023 on Monday, the strongest midday close since April. The central bank set its daily midpoint at 6.3411, 15 pips stronger than Friday's fixing.
"I expect to see the rate dip below 6.30 this week, though whether it stays there will depend a lot on the euro," said a trader at a major state-owned bank in Beijing.
The yuan has risen sharply over the last month, touching a six-month intraday high of 6.2945 last Thursday. That rise has mainly been due to the weakening of the dollar in global markets, as sentiment towards the euro crisis improved and the Federal Reserve launched a new round of bond buying.
Monday's advance in the yuan occurred despite the fact that the dollar index - which measures the greenback's value against a basket of currencies - was slightly stronger than its close on Friday.
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