Yuan reverses course, inches up on signs of state bank support

SHANGHAI: China's yuan slipped initially on Monday morning, but changed course and moved higher on selling of dollars by corporates and major state-owned banks.

The sales came amid some weakness of the dollar in overseas markets.

Prior to market opening, the People's Bank of China (PBOC) set the midpoint rate at 6.9006 per dollar, 181 pips or 0.26 percent weaker than Friday's fix of 6.8825.

The onshore yuan opened at 6.9102 per dollar, then eased to 6.9122, not far from a two-week low hit on Dec. 20, before the loss was erased. At midday, it was changing hands at 6.8989, or 81 pips firmer than the previous late session close.

Traders said that after the yuan traded below 6.91, state banks sold small amounts of dollars to prevent it from falling further.

State-owned banks usually act on behalf of the central bank in foreign exchange market, but they can also trade for their proprietary accounts.

With most global markets shutting for Christmas and many investors taking year-end holidays, traders expect the yuan to stay around 6.9 to the dollar and not have sharp gains or losses this week.

Traders noted that an official statement on Friday after a key annual meeting, the Central Economic Work Conference, made no mention of exchange rate policy.

Goldman Sachs economists said in a note that usually there is a statement about maintaining currency stability at an "appropriate level".

But they said "the omission of this statement does not necessarily imply the government will allow depreciation soon, especially given the trade negotiation" with the United States.

"Having said that this remains as an option especially if the dollar appreciates."

Stephen Chiu, FX and rates strategist at China Construction Bank (Asia) in Hong Kong, said it was hard to decide if no exchange rate mention means China would "tolerate" an overshoot in the yuan in a short period of time to breach 7 per dollar.

The global dollar index fell to 96.777 at midday from the previous close of 96.956.

The offshore yuan was trading at 6.9032 per dollar as of midday.