Yuan slips on uncertainties over pace of H2 rise

SHANGHAI: The yuan fell slightly against the dollar on Friday morning, despite the People's Bank of China fixing a near record high mid-point, as dealers became less certain over how quickly the Chinese currency would rise in the coming months.

The market expects the yuan to continue its appreciation in the second half of this year but the pace of its rise has become less clear due partly to falling global commodity prices -- a major cause for China to let its currency to add value.

China's high inflation, which has been propelled by food prices and is expected to rise to 6 percent in June after hitting a 34-month high of 5.5 percent last month, is not seen a direct stimulus for yuan appreciation, traders said.

China's moderating economy after a slew of official monetary tightening steps since last October may also push the government to think twice about its unofficial target for yuan appreciation for the rest of this year, they said.

"While the trend (for the yuan appreciation) is still there the pace has become increasingly uncertain," said a senior trader at a European bank in Shanghai.

"We have yet to adjust our forecast for all-2001 yuan appreciation but it could happen, possibly soon."

Spot yuan was trading at 6.4657 at midday on Friday, weaker from Thursday's close of 6.4640. It has now appreciated 5.58 percent since it was depegged from the dollar in June 2010 and 1.92 percent so far this year.

Before trade began the PBOC fixed the yuan's mid-point at 6.4685 against the dollar on Friday, near its record high of 6.4683 set on June 22 and stronger than the previous day's 6.4716.

Last month, the yuan rose only 0.2 percent following a similar pace of gain in May and compared with a 0.9 percent rise it marked in April, with falls in global commodity prices seen a major factor for the moderate rise allowed by the PBOC.

China is the world's fastest growing market for staple commodities. The benchmark Reuters Jefferies CRB index , which covers 19 mostly US-traded commodities, has fallen 8 percent since early May, reversing a uptrend seen earlier since June last year.

The slowdown in yuan appreciation has also coincided with renewed concerns over default by some European governments on their debt.

Chinese factory output expanded in June at its lowest pace in 28 months, a official survey showed on Friday, indicating the world's second-largest economy is feeling the pinch of monetary policy tightening and slack global demand.

And HSBC's China Purchasing Managers' Index (PMI) dipped further in June, pointing to a contraction in factory output for the first time in 11 months.

Many mainland traders started out the year expecting the yuan to gain by 5 to 6 percent for all of 2011, but uncertainty in global markets has apparently made the government more conservative in letting the currency rise so far this year.

Several dealers said they still expect the yuan could potentially gain 3-4 percent in the last six months of the year but their forecasts for the pace of appreciation could change if all signals point to unfavourable conditions for such a rise.

While questions hover over the expected pace of yuan's rise, the consensus is for the currency to appreciate for the rest of this year as China adjusts its economic policy to become less reliant on exports for growth.

Offshore, benchmark one-year dollar/yuan non-deliverable forwards (NDFs) were bid at 6.3720 by midday, down slightly from 6.3760 at the previous day's close. Their implied yuan appreciation in a year's time rose slightly to 1.51 percent from 1.45 percent.

Copyright Reuters, 2011