SHANGHAI: The Chinese yuan strode to a fresh four-month high on Wednesday, shrugging off a weaker central bank midpoint on strong corporate yuan demand and tight liquidity in the money market.
Traders cited strong corporate demand for the yuan ahead of the week-long Mid-Autumn festival and National Day holidays starting from late September. Bank of China was seen selling dollars heavily into the market.
"The market is being driven mainly by order flow today. Customers are demanding yuan," said a trader at a major state-owned bank in Beijing.
Spot yuan closed at 6.3093 per dollar, its strongest close since May, reaching an intraday high of 6.3010.
Tight yuan liquidity in China's domestic money market also played a role. The overnight bond repurchase rate soared, pushing up cost of the "tomorrow/next" swaps commonly used to hedge overnight short yuan positions. That sapped traders' appetites for carrying such positions.
The dollar index strengthened overnight on Tuesday, prompting the central bank to set its midpoint 39 pips weaker at 6.3392 against the dollar. But the US currency weakened slightly during Asian trading hours, further supporting the yuan.
The yuan has strengthened steadily since closing at a 2012 low of 6.3885 on July 25, tracking the dollar's fall against the euro and other currencies.
But traders say significant further appreciation is unlikely this year, now that the market has digested the impact of the Federal Reserve's latest round of quantitative easing (QE3). Most see a floor at 6.30.
An article in the People's Daily, the official newspaper of the Chinese Communist Party, noted on Wednesday that QE3 - along with steps to address the euro crisis - had weakened the dollar in recent weeks, but cautioned that China should focus on its own interests and not allow the yuan to rise too quickly.
Notably, while the yuan gained against the dollar in August, the dollar's weakness caused the yuan to fall against a broader basket of currencies. That's because despite greater flexibility this year, the yuan's link to the dollar remains tight.
The yuan's real effective exchange rate (REER) fell 0.3 percent in August, according to data from the Bank of International Settlements.
REER reflects the yuan's value against a trade-weighted basket of currencies and also corrects for changes in relative prices.
Comments
Comments are closed for this article.