China's yuan firms as dollar falls, eyes on Britain's EU referendum

SHANGHAI: China's yuan strengthened versus the dollar on Monday, buoyed by a fall for the greenback in global markets, while the coming referendum in Britain on remaining in the European Union kept Chinese investors nervous.

The dollar index slumped 0.7 percent in Asian morning trade as sterling rallied, with momentum swinging in favour for Britain to remain in the EU days ahead of Thursday's vote.

"Investors are nervous not to make a wrong bet," said a senior trader at an Asian bank in Shanghai.

"There is heavy yuan short-covering this morning after the market generally bet on the possible Britain's exit from the EU last week."

The spot market opened at 6.5793 per dollar and was changing hands at 6.5794 at midday, 0.16 percent stronger than Friday's close.

Prior to the market opening, the People's Bank of China set the midpoint rate at 6.5708 per dollar, 0.13 percent firmer than the previous fix of 6.5795, also reflecting the dollar's global weakness.

Traders said changing expectations of whether Britain will remain in the EU will be the key factor to decide the yuan's value in coming days.

If Britain votes to stay in, it is expected that the pound will continue to rally, and the yuan then is likely to rebound above 6.55 to the dollar.

But if exiting the EU is approved, the yuan is likely to tumble below 6.62 against the dollar. That would be lower than last Wednesday's 6.6047, the weakest level since January 2011.

Traders say that for some Chinese investors, risk will mount if Britain remains in the EU, as they have shorted the yuan this year, partly betting it will depreciate amid a sharp slowdown of the world's second-largest economy.

Meanwhile, the PBOC has tolerated more yuan volatility this year through reforms towards more market-oriented mechanisms to price the Chinese currency.

The Financial News, the PBOC's mouthpiece newspaper, reaffirmed on Monday that there was no basis for the yuan to depreciate over the long term, but more two-way volatility is unavoidable while reforms proceed.