China's central bank guides yuan up again, may be sending stability signal

SHANGHAI: China's yuan edged up against the dollar on Wednesday for the second day after the central bank again fixed a slightly higher official midpoint, a move that traders said may be sending the first signal that Beijing wants to keep the yuan stable for now.

The People's Bank of China (PBOC) engineered a steep yuan depreciation in February and March, making use of the country's traditionally weak foreign trade in the first quarter of the year to strike at speculators betting on non-stop yuan appreciation.

However, traders widely expect China's foreign trade will recover in the second quarter, creating a large trade surplus. With dollars plentiful in the domestic market, the PBOC will have to pay heavily to force yuan depreciation by intervening to buy dollars.

"Market conditions will favour a stronger yuan starting in the second quarter," said a trader at a major European bank in Shanghai. "While we still see volatility from time to time, the yuan is expected to generally remain stable in the second quarter, possibly appreciate slightly."

The spot yuan stood at 6.2040 per dollar at midday, up 0.05 percent from Tuesday's close, after the PBOC fixed its mid-point at 6.1493, up 0.02 percent from the previous trading day.

In addition to dollar supply and demand, China has posted a slew of weaker than expected economic data for the first quarter of this year, sparking worries over the health of the world's second-largest economy.

Traders said the PBOC will also not let the yuan depreciate to levels that would harm China's economy.

The yuan depreciated a combined 2.54 percent against the dollar in February and March, its biggest bimonthly loss since China established the domestic foreign exchange market in 1994, as the central bank launched its latest campaign against speculators who are long yuan.

Despite a few cases of PBOC-manipulated yuan depreciation, the currency has generally staged one-way appreciation and has risen more than 33 percent since its landmark revaluation in 2005, supported by factors such as strong capital flows into China, including those derived from trade surpluses.