China's yuan rose on Monday after the central bank nudged the daily midpoint fixing up as it extended the use of a well-worn policy template during times of market stress. Realised daily volatility, or price swings, in onshore yuan plummeted towards its lowest levels seen this year as the People's Bank of China kept daily trading in a tight band contrasting with the violent moves in onshore stock markets.
The eerie calm in the onshore currency markets spilled over to offshore markets where price discovery is more market determined and where hedge funds attempts' to take short positions in the yuan in recent days has been offset by the large presence of state-owned banks. "It is completely dead," said a currency trader at a European Bank in Hong Kong referring to currency trading in the offshore yuan. "There were a couple of volatile days last week but Beijing is unlikely to let the currency weaken." In keeping the fixing stable, Beijing is using a well-worn template seen during times of market stress where it minimises currency market volatility to dampen concerns of capital outflows.
On Monday, the People's Bank of China set the daily midpoint at 6.1133 per dollar, its strongest fixing since June 23 and stronger than Friday's fix of 6.1153. Responding to the strong fixing, the yuan edged higher to 6.2082 per dollar in early trade compared with 6.2092 at the previous close. The offshore yuan also strengthened mildly. Market strategists are unsure how far the yuan's strong run will continue as it seeks to loosen policy to calm investor sentiment after the recent slide in Chinese stock markets where onshore indexes have lost nearly a third of their value in a month. "Easier monetary policy should translate into lower market interest rates and put downward pressure on the currency though the timing of that is uncertain especially with the likely inclusion of the yuan in the IMF's SDR basket this year," said Adarsh Sinha, an FX strategist at Bank of America Merrill Lynch.
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