SHANGHAI: The yuan edged higher against the dollar on Monday, mirroring a broader fall in the greenback in its last trading session and shrugging off the weakest central bank reference rate for the Chinese unit this year.
Spot yuan traded at 6.3586 per dollar at midday, 14 pips stronger, after the dollar index weakened in European and US trade late on Friday and early Saturday China time.
The central bank's midpoint of 6.3456 on Monday was its weakest fixing of the year, 9 pips weaker than the previous year-low set on Friday.
The midpoint fixing is the base rate that the People's Bank of China's (PBOC) uses to flag the government's intentions for the yuan's value, and from which the local unit is allowed to rise or fall 1 percent in a single day.
Though weaker than previous reference rates, the PBOC's recent fixings are still stronger than the current level of spot transactions. The yuan has consistently traded weaker than the midpoint since March.
But traders interpret the weaker midpoints as a sign that the central bank is willing to permit further yuan weakness, if global market forces push in that direction.
The yuan has closely tracked the value of the euro and other non-dollar currencies in recent months, with the yuan weakening when safe haven demand pushes up the value of the greenback.
"The euro will still be a key factor," said a trader at an Asian bank in Shanghai, describing what is likely to affect the yuan's value in the next few weeks.
The market showed little reaction to trade data released on Friday, which showed China's July exports rose just 1 percent from a year earlier, undershooting forecasts by a big margin. .
"Even though exports didn't increase very quickly, the trade surplus is still large in absolute terms," said a trader at a major state-owned bank in Beijing.
Indeed, the trade surplus was $25 billion in July, down from $32 in June but still well above the monthly average of $14 billion through the first seven months of 2012.
Traders also say order flow from corporate clients is becoming more balanced, after several months in which dollar demand vastly outstripped yuan demand.
The yuan has fallen 1 percent on the year, battered by the euro crisis and a domestic economy growing at its slowest pace in more than three years. But the currency is up about 0.1 percent so far in August, buoyed by the euro's recovery from its lows of late July.
Offshore, one-year non-deliverable forwards were bid at 6.4250 at midday, implying 1.0 percent depreciation over the next twelve months, in line with Friday's close.
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