SHANGHAI: China's yuan firmed on Tuesday as major state-owned banks sold dollars, while weak demand by companies for the US currency also offered a helping hand, traders said.
The People's Bank of China set the midpoint rate at 6.9468 per dollar prior to the market opening, weaker than the previous fix of 6.9312.
"The midpoint was back to normal, and dollar demand by companies was not so strong at current levels, so the market was relatively stable," said a trader at a Chinese bank in Shanghai.
The market was confused by Monday's official guidance rate, which was set at a much firmer level than traders had expected.
"But the state banks were 'on duty' in morning trade," the trader added, noting that state-owned banks were selling dollars in the onshore forex market as the spot rate opened at an 8-1/2-year low of 6.95 per dollar.
State-owned banks have offered dollar liquidity regularly over the past two months in what traders believe is part of efforts to support the Chinese yuan from falling too fast.
The spot market was changing hands at 6.9507 at midday, 6 pips firmer than the previous late session close and 0.05 percent softer than the midpoint.
Separately, the yuan was little changed after the Bank of Japan kept monetary policy steady and offered a brighter view of the economy on Tuesday.
The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 96.05, firmer than the previous day's 95.8.
The global dollar index fell to 103.08 from the previous close of 103.14.
In the offshore market, Hong Kong's overnight yuan borrowing rate still hovered at an elevated level with the CNH Hong Kong Interbank Offered Rate benchmark (CNH Hibor) rising to 10.81733 percent, compared with 10.00000 percent a day earlier.
Overnight implied deposit rates for offshore yuan - another indicator showing the state of demand in the market - climbed as high as 12.389 percent at one point in morning trade, Reuters data showed.
The offshore yuan was trading 0.09 percent firmer than onshore spot at 6.9443 per dollar.
Offshore one-year non-deliverable forwards contracts (NDFs), considered the best available proxy for forward-looking market expectations of the yuan's value, traded at 7.264, 4.37 percent away from the midpoint.
One-year NDFs are settled against the midpoint, not the spot rate.
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