SHANGHAI: China's central bank set the yuan midpoint at a slightly stronger level on Thursday, but spot prices moved in the opposite direction, closing 0.96 percent weaker than the midpoint and closing on the limit of the trading band.
Speculation that the United States and China are preparing to ease monetary policies to spur growth has been swirling through the markets, but neither has given a clear indication of their plans.
China's central bank drained liquidity for the second consecutive week on Thursday and raised a key money rate.
"This sends a negative signal to the market as it appears to be policy tightening at a time when the buzz has all been about easing," wrote Dariusz Kowalczyk, economist at Credit Agricole CIB, in a research note, adding that the development should put upward pressure on yuan spot prices.
However, the spot yuan did not appear to respond to the news, and the rate weakened through the day to close at 6.3734 per dollar.
Spot yuan continued to trade far weaker than the central bank fixing, set at 6.3126, which compared with a previous fixing at 6.3140.
Traders told Reuters the central bank has used the midpoint to signal to the market that it will not let the yuan slide below 6.4 against the dollar, for fear of triggering destabilising capital outflows.
The dollar index, which the central bank frequently consults when setting the midpoint, strengthened slightly in overnight trade but stayed flat in intraday trade.
The index hit a two-year high against its trading basket -- which is dominated by the euro -- on July 12, and has remained in the neighborhood since.
The yuan continues to trade at a decade-high against the euro, causing a headache for Chinese exporters as overall growth slows.
OFFSHORE MARKETS
Offshore yuan markets also remain flat. Non-deliverable one-year forward contracts (NDFs) traded in Hong Kong at 6.4150 at close, a discount of around 0.6 percent to the current rate.
Most economists expect the yuan to appreciate slightly against the dollar this year. Analysts said that differing interest rates in Hong Kong and the mainland help explain why one-year NDFs appear to be predicting a depreciation.
Offshore yuan deposit exchange rates remained tightly bound to the onshore rate at 6.3720.
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