SHANGHAI: The yuan rebounded sharply on Tuesday, recovering most of the ground lost during a late-day tumble on Monday afternoon that was apparently orchestrated by the central bank.
Despite the yuan's gains on Monday, traders say that revived dollar demand is what has restored liquidity to the market following weeks of near paralysis.
On Monday afternoon, the People's Bank of China (PBOC) apparently stepped in to act as dollar-buyer of last resort and jumpstart trading, after the yuan had remained at the strongest level permitted by the official daily trading range almost all day, amid sickly trading volumes.
Volume remained healthy on Tuesday morning, with traders reporting steady dollar demand, though they were unsure if the PBOC was still in the market.
Traders say that even without dollar buying by the central bank -- or perhaps in addition to some moderate dollar-buying -- dollar demand could recover at year-end, when firms need dollars to meet accounts payable.
Spot yuan firmed to 6.2321 per dollar at midday, markedly firmer than Monday's close of 6.2451 but near the 6.2293 level where yuan traded for most of Monday, before the central bank apparently stepped in.
The yuan briefly touched 6.2277 on Tuesday morning, the strongest level permitted by the central bank, but in a departure from the pattern established over the last month, it did not remain glued to that limit.
The PBOC set its midpoint at 6.2906 on Tuesday, slightly firmer than Monday's fix of 6.2922. The spot rate is allowed to diverge by no more than 1 percent from the midpoint the central bank sets each morning.
Trading volume was robust on Tuesday, reaching $6.9 billion by midday compared to only $335 million on Monday.
Still, traders say it's still too early to conclude that the deadlock between the central bank and the market is really over.
Traders caution that the spot rate could still return to limit-up later today.
That deadlock has seen volume plummet as the yuan hit limit-up for 31 of the last 34 sessions amid an absence of dollar bids.
Traders are generally unable to definitively confirm the PBOC's presence in the market, but when major state banks start buying or selling aggressively, as they did on Monday afternoon, it is typically interpreted as a sign that they are squaring positions created via trades with the central bank.
But trades involving the PBOC are generally invisible to the rest of the market.
Center>Copyright Reuters, 2012
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