SHANGHAI: The yuan opened flat and stayed that way on Tuesday, as traders awaited signs of a new direction after the currency posted a sharp drop on Monday in reaction to a two-day rise in the dollar index.
The central bank set the midpoint at 6.3211 on Tuesday, only 19 points stronger than Monday's fix. Spot yuan similarly opened within 11 pips of Monday's close and traded within a narrow range of 38 points throughout the morning. Spot yuan changed hands at 6.3650 at midday, 5 pips weaker than opening.
"After yesterday's high volatility, today the movement has stabilized. The important thing is that everybody is seeking and not finding signs of market direction," said a trader at a bank in Beijing.
In the first five minutes after market opening, there were no transactions," he added.
Although Monday saw high paper volatility - at one point the currency traded at a 7-month low against the dollar - the currency has actually been flattening out for the last week. The 5-month low was generated by a single outlying trade, but the weighted moving average of the spot yuan has moved by a mere 12 pips since last Tuesday.
The spread between spot prices and the midpoint also narrowed since trading at a record 0.98 percent away from the fix on Thursday. Today spot prices remain around 400 pips away from the midpoint.
Traders said that although global markets continued to be long on the dollar index, its effect on the yuan market today was limited, especially given the lack of significant developments expected from the upcoming summit in the European Union.
Beijing frequently adjusts the midpoint in reaction to movements in the dollar index, and traders say regulators are using midpoint settings to signal that the government will not tolerate drastic movements in the dollar/yuan rate.
The forwards markets continue to imply depreciation. Offshore, 1-year non-deliverable forwards (NDFs) were bid at 6.4190 and offshore deliverables of the same tenor traded at 6.4495. Onshore yuan forwards also suggested depreciation, bidding at 6.4055.
NDFs prices have declined by nearly 3 percent since mid-February.
Offshore spot yuan continue to trade near but slightly below the onshore spot at 6.3705 per dollar.
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