SHANGHAI: China's yuan opened slightly weaker on Thursday following three consecutive trading days of record-high settings, but the spot market remained firmly entrenched in the narrow range it has been in since mid-March.
The central bank set a midpoint of 6.2697 in the morning. Traders continued making transactions that priced spot yuan between 6.30 and 6.31 per dollar.
"Traders are very comfortable to hold short here," said a trader at a joint-stock bank in Shanghai. "I think the market is being relatively smart."
He said that traders are weighing economic developments away from China and at home when pricing the yuan, adding that although the euro and other currencies weakened against the dollar in overnight trading, the new fixing was set only slightly below the record high it set on Wednesday.
The yuan continued to explore its widened trading band, which was increased to 1 percent from 0.5 percent on April 16. The currency opened at 6.3084, 0.61 percent weaker than the fixing, then weakened further to trade 0.64 percent from the midpoint, the widest it has ranged away from central bank guidance since the band was widened.
Market players believe the recent trend of high midpoints is related to the US-China Strategic and Economic Dialogue which opened on Thursday.
While most economists predict that the yuan will appreciate by 2-3 percent in 2012, onshore and offshore forward markets are both discounting the yuan against the dollar. Offshore one-year non-deliverable forwards (NDFs) were trading at 6.3470 at midday, 0.58 percent weaker against the dollar.
Onshore one-year yuan forwards, which can only be traded by entities holding yuan in mainland accounts, were trading at 6.3366, 104 pips stronger than NDFs.
Explanations for the phenomenon vary.
Standard Chartered economist Stephen Green says the recent, apparent depreciation pressure is a mystery.
"It is possible ... that the central bank was buying its dollars outside of market hours in Q1, and that this was therefore not impacting the CNY's market valuation," Green wrote in an April 27 research note.
Traders said speculation and arbitrage may also be playing a role in holding down the yuan.
"It seems that onshore USD/CNY spot is having a difficult time breaking the 6.30 level and is under upward pressure due to arbitrage flows between onshore forwards and offshore forwards," wrote Dariusz Kowalczyk, an economist at Credit Agricole CIB, in a research note distributed Thursday.
Offshore spot yuan continued to trade close to the onshore renminbi at 6.3075 at midday.
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