SHANGHAI: The central bank set the yuan midpoint higher for the second day on Tuesday as the dollar index fell again in response to weak retail sales data.
Spot prices also strengthened but appeared to be dragged upward by the higher midpoint. Spot prices are only allowed to trade within a 1 percent range in either direction of the official fix.
Spot yuan opened at 6.3732, firming slightly from Monday's close, but remained relatively flat in intraday trade, changing hands at 6.3741 per dollar at midday.
Traders said the market was awaiting clearer signs from the US and China as to whether there will new monetary easing.
"Today's trade is extremely flat," said a trader at a major Chinese bank in Shanghai. "It's only moved within 10 points so far." He said that most major buyers remained on the sidelines.
Weak economic data in the US has reinvigorated expectations that the Fed will intervene with a third round of monetary easing to sustain growth.
The dollar index, which tracks the US dollar's value against a basket of major currencies dominated by the euro, has continued to sink from the two-year high of 83.829 hit on Thursday. But at 82.980, it still remains relatively strong against the euro-dominated basket.
Traders have said they believe the People's Bank of China (PBOC) is propping up the yuan to prevent drastic movements in either direction. They say the midpoint settings serve as a signal that 6.40 against the dollar is the weakest level the PBOC will tolerate for now.
An overly quick depreciation of the yuan could cause destabilising capital outflows, which would be exacerbated by the current slowdown in inbound foreign direct investment. The Ministry of Commerce said Tuesday that FDI into China declined by 3 percent in the first half of 2012 from a year earlier.
After China on Friday reported its slowest quarterly growth pace in three years, comments by Chinese Premier Wen Jiabao on Sunday have been interpreted by some to suggest that Beijing is also preparing to open the taps and ease monetary policy.
DIFFERING INTEREST RATES
Offshore one-year non-deliverable yuan forward contracts traded at 6.4150 at midday Tuesday, implying depreciation of around 0.7 percent against the dollar in the next 12 months.
However, the gap is also in part an expression of different interest rates in Hong Kong and the mainland, a trader at a foreign bank in Shanghai said.
Offshore spot yuan (CNH) was trading at about 6.3740, roughly in line with the onshore spot level.
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