SHANGHAI: The yuan set a new peak on Wednesday, closing at it highest level since the domestic market was created in 1994, as US presidential candidates debated over who would be tougher on China, long accused of undervaluing its currency to help exporters.
Before the market opened, the People's Bank of China (PBOC) set the yuan's midpoint at 6.3028 to the dollar, the highest fixing since late June. The midpoint has climbed steadily since markets reopened after a holiday week in the first week of October.
Spot yuan opened at 6.2550 against the dollar, stronger than Tuesday's record closing high of 6.2640, continuing an upward trend that began late September. However, the currency remained tightly range-bound in intraday trade, closing slightly firmer at 6.2545.
Market participants have been struggling to explain why the Chinese central bank has pushed the yuan midpoint upwards, and some speculate that Beijing is trying to provide US President Barack Obama with rhetorical firepower against Republican candidate Mitt Romney, who criticised him for refusing to formally label China a currency manipulator.
"As far as currency manipulation, the currency's actually gone up 11 percent since I've been president because we have pushed them hard," Obama said, during the second presidential debate, which occurred as China's forex market opened on Wednesday.
"It is increasingly clear that geopolitics may be triggering the rally in the CNY," wrote Dariusz Kowalczyk, forex strategist at Credit Agricole CIB and leading advocate of the thesis that Beijing is meddling with the yuan for diplomatic purposes.
"Beijing may have modified its FX policy to respond to US pressure," he wrote in a research note distributed Wednesday.
Traders, however, say the third round of US monetary loosening has put downward pressure on the dollar index, and by extension propped up the yuan.
The dollar index has been sliding steadily this week, and a trader at a Chinese bank in Shanghai said this has encouraged investors to go long on the yuan.
"Even though there is some dollar buying activity, while the dollar trend remains weak, the yuan's exchange rate will continue to climb," he said.
However, traders told Reuters that the yuan is encountering resistance at 6.25 against the dollar, at which point corporates, in particular firms which trade in natural resources, move in to buy dollars.
A Reuters poll of 20 FX analysts earlier this month showed that on average, they expect the yuan to gain an additional 0.9 percent over the next 12 months to 6.23.
But analysts also expect a pull-back in the near term. The consensus forecast is that the yuan will end 2012 at around 6.30, slightly below the 6.2940 level where it closed 2011.
In trade-weighted terms, the yuan's relative value against a basket of currencies has been slipping steadily since mid-summer.
According to data from the Bank of International Settlements released on Monday, the yuan's trade-weighted value in nominal terms fell by 1.4 percent over July through September, and it also began declining in real terms in August.
Offshore non-deliverable one-year forwards (NDFs) continue to imply depreciation, although they have begun to firm alongside spot prices. NDFs changed hands at 6.3540 late on Wednesday.
The offshore yuan spot rate was quoted at 6.3840 to the dollar, although it touched 6.2515 earlier in the day, its strongest level since Jan. 21. The offshore spot yuan has closely tracked the onshore version for the most part since February.
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