SHANGHAI: The yuan closed a fraction firmer against the dollar on Tuesday, starting and ending the day at the strongest level permitted by an official daily trading range, but the central bank's refusal to let the yuan gain faster has choked off trade.
The stance taken by the People's Bank of China has left the onshore currency market deadlocked, with the yuan lodged on the limit of the central bank's trading range in 26 of the last 29 sessions.
Trasaction volumes have dwindled with corporates only trading on a needs basis. Analysts say the central bank strategy is to force the market to whittle down an overhang of dollars by itself, and only intervening to sell yuan when the market's illiquidity becomes very pronounced. There were no signs of such intervention on Tuesday, traders said.
Spot yuan closed at 6.2256 per dollar, firming from Monday's close of 6.2279.
The PBOC allowed the yuan's slight gain by setting its daily midpoint at 6.2885 to the dollar on Tuesday, compared with Monday's fix of 6.2908.
The central bank lets the exchange rate diverge by no more than 1 percent from the midpoint it sets each morning.
Volume dropped further to $2.590 billion on Tuesday from an already-thin $4.002 billion on Monday. That compares with an average full-day average volume of $13.9 billion in the first nine months of this year.
"The deadlock hasn't much affected corporate real needs for foreign exchange business, so companies are not in a hurry to break it," said a trader at a major Chinese commercial bank in Shanghai.
"The PBOC appears not to care about the lack of speculation in the market, so it also takes a wait-and-see attitude."
Both the PBOC and the market appear to be playing a waiting game, hoping the other will give ground to break the deadlock.
The PBOC wants to discourage speculation on yuan appreciation by holding its midpoint firm, thereby squeezing appreciation expectations out of the market, traders say.
The market, by contrast, hopes the PBOC either allows the yuan to strengthen, or begins buying more dollars.
In China's rigid foreign exchange regime, the PBOC has always been the ultimate supplier of liquidity. But traders say the PBOC now appears determined to reduce its interventions in the market, even if it must endure a period of weak liquidity.
The domestic market is flooded with foreign exchange, as companies rush to unload dollars amid the yuan's dramatic comeback since late July.
The yuan now stands 1.1 percent up against the dollar for the year so far, rallying 2.7 percent from its late July low.
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