SHANGHAI: China's central bank set a slightly stronger midpoint for the yuan on Thursday but the marginal move was not enough to close the persistent gap between the fix and spot rate.
The midpoint firmed seven pips to 6.3060 per dollar, but the spot rate - which is allowed to rise or fall 1 percent from the midpoint on any given trading day - promptly began trading at 6.2429, 1 percent stronger than the fix.
The spot market has been bullish since late September, pushing the yuan to hit a record high against the dollar on October 31.
Since then the central bank has tried to guide the spot market into weaker territory using weaker midpoint settings, but customers in the spot market have refused to take the hint and continued to sell off dollars for yuan at the strongest permissible intraday rate.
"This situation has gone on for a while now," said a trader at a joint stock bank in Shanghai. "Fundamentally, there's just not much interest in buying dollars."
The persistence of the trend, even after the US presidential campaign has wound down, suggests there are enduring market drivers behind the yuan's recent strength.
Many originally theorized that the central bank had quietly pushed up the rate in September to weaken Mitt Romney's case that China has depressed the value of its currency.
True or not, the election is over and yet Chinese corporates are still long on yuan and short on dollars.
In addition, offshore markets for the spot yuan in Hong Kong (CNH) are even more bullish than the onshore market. The CNH changed hands at 6.2370.
Economists point to several market factors that might be causing corporates to going long on yuan so strongly. First, the third round of monetary easing in the US (QE3) is flooding global currency markets with dollars and encouraging some investors to move toward emerging market currencies.
Second, Chinese companies themselves appear to have established overly pessimistic short-yuan positions in the first half of the year, when the yuan steadily lost ground against a dollar that shot upwards in response to the Greek debt crisis.
Third, there are tentative signs of a nascent economic recovery in China, and some market participants speculated that Chinese companies are hoarding yuan for domestic operations.
But few expect the trend to continue much longer. For one thing, the dollar index has been climbing upwards since mid-October. For another, Chinese companies appear to be drawing down their hard currency reserves to buy yuan, capping their appetite. Finally, the central bank cannot afford to permit much more appreciation without risking damaging exports, which remain weak.
Offshore forwards markets continue to forecast depreciation over the next twelve months. One-year non-deliverable forwards contracts changed hands around 6.3530 on Thursday, implying depreciation of around 1.7 percent.
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