SHANGHAI: The yuan edged lower against the dollar on Wednesday, while the People's Bank of China (PBOC) fixed a slightly weaker mid-point, signaling it may favour a pull-back in coming days after setting the mid-point at record highs in recent sessions.
Despite the run of higher mid-points, the yuan's range in real-time trading has been more muted because Chinese firms do not expect Beijing to let the yuan appreciate sharply any time soon and do not want to price the currency aggressively, traders said.
The PBOC appears to have been testing the water for wider movements in the yuan/dollar exchange rate since the start of this month following China's rare trade deficit in February, which eased market pressure for a firmer yuan.
In the past, the PBOC has exercised restraint when adjusting the mid-point in order to maintain a gradual rate of change.
Traders said they believed the PBOC will still keep a tight grip on the yuan's value for now, using the mid-point to signal the direction and extent of the yuan's daily fall or rise.
Premier Wen Jiabao said earlier this month China would intensify reforms of its currency regime and allow the yuan to float more freely. PBOC governor Zhou Xiaochuan also said conditions were ripe for the yuan's exchange rate to float more widely.
However, traders said any sudden loosening of the PBOC's grip on the exchange rate could lead the market to perform unpredictably.
As a result, any reforms of the yuan's pricing mechanisms would take time, they said, warning against assigning too much significance to recent volatility in the yuan mid-point.