SHANGHAI: China's yuan firmed against the dollar on Wednesday following a stronger midpoint by the central bank, but trades continued to cluster near the strong-side limit of the trading band.
The central bank set its midpoint at 6.3067 per dollar, slightly stronger than Tuesday's fix of 6.3078.
Spot yuan also firmed up to 6.2436 per dollar, continuing to hug the strong-side of its intra-day trading band as it has all week.
The exchange rate can rise or fall 1 percent from the mid-point set by the central bank each day.
The market's reason for the yuan's recent strength has much to do with global attitudes toward the dollar. The dollar index , which tracks the dollar's value against a basket of currencies, has been slipping over the past two days in the run-up to the US election.
While long-term economic implications of the election outcome are complex, a rough consensus is that, at least in the short term, a second term for Obama - in the face of a Congress that looks set to remain controlled by Republicans - increases the risk of policy paralysis in the face of the upcoming "fiscal cliff" facing the United States. This is driving investors to shed risk and move into bonds.
These factors, in combination with the effects of ongoing US monetary stimulus, have put downward pressure on the traded value of the dollar, and in China has encouraged corporates to dump dollars in favour of yuan.
However, many market observers believe the yuan has also been pushed up by Beijing's desire to support President Barack Obama, whom many believe will take a less confrontational approach to China that his opponent Mitt Romney. Romney said he would label China a "currency manipulator" on day one in office.
Now that Obama has been re-elected, Beijing has less reason to fear that the yuan's exchange rate will return as a major diplomatic issue.
At the same time, economists believe that both the political and market-driven reasons for the yuan's recent historical highs - and its recent habit of repeatedly bouncing off the edge of its trading band - are unsustainable.
On the political front, with Obama re-elected, it removes whatever reasons Beijing had for pushing the yuan upward.
In terms of corporates, their apparent bullishness toward the yuan will be capped by their need to retain hard currency on hand for trade, which will cap the amount of dollars that can be poured into the market.
Offshore 1-year non-deliverable forwards contracts (NDFs) traded in Hong Kong continued to forecast yuan depreciation over the next twelve months, changing hands at 6.3470 at midday.
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