SHANGHAI: The yuan touched its lowest level in a week on Thursday, after the US currency rose in global markets the day before and a large order set off a burst of dollar buying in early trade.
The yuan touched 3.3690 per dollar in early trade on Thursday, its weakest level since Aug. 7, before gaining slightly to 6.3683 by midday, 0.1 percent weaker than Wednesday's close.
That compared to a roughly 0.3 percent rise in the dollar index between Wednesday's close and midday Thursday.
Traders said a bank in south China placed a large dollar order, provoking other banks to follow suit, buying dollars in anticipation of yuan depreciation.
"With the euro not moving much, customer flow is still driving the spot rate," said a traders at a western bank in Guangzhou.
Despite the drop on Thursday, traders widely expect the spot rate to remain in the 6.35-6.38 range in the next several weeks. It has fluctuated in that range since June, briefly touching a year-low of 6.3967 on July 25.
"The market has been quite stable intraday recently. The main risk is overnight," said a trader at a European bank in Shanghai.
Since a rule change in April allowed banks to carry short dollar positions overnight, overnight FX swap volumes, which banks used to hedge overnight risk, have soared, central bank data shows.
The relative stability of the yuan over the last week could also explain why customer flow has become more balanced between yuan buyers and sellers, compared with the May-July period, when dollar demand strongly exceeded yuan demand in China's interbank market.
Though China continued to run a sizable trade surplus in that period, yuan demand evaporated, as corporates chose to hold on to their dollar receipts rather than trading them for yuan.
With the euro crisis sparking safe haven demand for dollars globally, Chinese corporates hoped to book FX gains by holding on tightly to their dollars.
But with the yuan stabilising, corporates may now be less worried about yuan depreciation.
Despite this balancing trend, however, the yuan has continued to trade weaker than the midpoint, as it has since mid-March. As long as such a trend continues, significant yuan appreciation remains unlikely. The yuan has fallen 1.2 percent in 2012.
In the offshore market on Thursday, one-year non-deliverable forwards were bid at 6.4470 at midday, implying 1.2 percent depreciation over the next twelve months, little changed from Wednesday's close.
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