The yuan closed up slightly on Friday, as the market shrugged off data showing that China's foreign exchange reserves fell markedly in the fourth quarter last year. Spot yuan finished at 6.3066, 112 pips stronger than Thursday's close. The People's Bank of China (PBOC) held to its recent pattern of linking its daily mid-point to the dollar index ahead of the forex reserve figures.
After the dollar weakened slightly overnight, the central bank set a mid-point of 6.3201, marginally stronger than Thursday. The central bank appears to be relying on the dollar index as market consensus has emerged that two-way volatility in the yuan will become the norm this year.
"In a situation where there are no clear expectations of appreciation, the link with international markets will grow stronger and stronger," said a trader at a major state-owned bank in Shanghai. With expectations of two-way volatility already firmly entrenched prior to the release of the new forex reserves data, market reaction was muted.
In the offshore non-deliverable market, one-year forwards traded at 6.3020 in afternoon trade, virtually unchanged from Thursday's close. The rate implied 0.3 percent appreciation over the next year. Offshore yuan traded at 6.3105, also flat. At the level, CNH was at a 0.06 percent discount to the onshore close.
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