Yuan stable as corporate order flow grows more balanced

SHANGHAI: The yuan traded flat on Tuesday morning, following a central bank fix that was little changed from Monday, as traders say customer flow is becoming more balanced after months of excess dollar buying.

The yuan traded at 6.3624 per dollar near midday, eight pips weaker than Monday's close, after the central bank set its daily reference rate at 6.3443, 13 pips stronger than Monday's fix.

"The midpoint was set pretty stable. If the yuan fell slightly, it's mainly due to a bit of excess dollar buying," said a trader at a major state-owned bank in Beijing.

Following several months in which dollar buying vastly outpaced dollar selling in China's interbank market, traders now say that order flow is becoming more balanced.

The yuan touched a year low of 6.3967 on July 25 and has strengthened steadily since then, mirroring a mild retreat in the dollar globally.

Traders are in wait-and-see mode and loath to predict near-term movements in the currency.

"I think it's still demand/supply. The rate will be driven by corporates and their forex requirements," said a trader at a European bank in Shanghai.

Others emphasize the twists and turns of the euro crisis and the effect on the dollar's value against both the euro and other emerging Asian currencies will be the driving factor.

Ultimately, the two factors are related. If Chinese exporters see safe haven demand pushing up the dollar in global markets - as they have for much of 2012 - they will hold on to their dollar receipts, rather than trading them for yuan, as they did in past years.

Onshore Chinese FX deposits increased 60 percent between October 2011 and June 2012, Ethan Mou, rates strategist at Bank of America-Merrill Lynch, wrote in a note to clients on Monday.

This preference for holding dollars is largely responsible for the relative scarcity of dollars in the interbank market, which has caused the yuan to fall 1 percent this year, Mou argued.

In the offshore market on Tuesday, one-year non-deliverable forwards were bid at 6.4240 near midday, implying 1.0 percent depreciation over the next twelve months, in line with Monday's close.