Yuan slips

The yuan fell moderately against the dollar on Tuesday after the central bank persisted in setting the Chinese currency's reference rate lower than the market wanted. Before the start of trade, the central bank set a weaker mid-point of 7.5556 to the dollar, down slightly from Monday's reference rate of 7.5546 and sharply lower than the market's close of 7.5443 on Monday.
It was the fourth trading day in a row that the People's Bank of China, in an apparent attempt to guide the yuan down, had set a lower mid-point than the previous day's close.
"The market is yielding to the central bank's pressure as banks fear a much faster pace of yuan appreciation might prompt the central bank to intervene in trading," said a dealer at a European bank. "But the recent large dollar supply in the market, and strengthening expectations for yuan appreciation, are likely to keep the yuan mostly above 7.5500, higher than the central bank's mid-points in recent days," he said.
The yuan mostly traded slightly above 7.5500 on Tuesday, down from Monday's close but about 60 pips above the mid-point. It closed at 7.5497. In the previous two days, the yuan mostly traded about 100 pips above the mid-point, as the market priced the currency above levels which the central bank seemed to want.
On Friday, the yuan ended 0.21 percent above the mid-point - its biggest rise above the reference rate since it was revalued in July 2005. On Monday, it ended 0.14 percent higher, one of its ten biggest rises beyond the mid-point this year.
Tuesday's close brought it back to within 0.08 percent of the mid-point, a normal distance by this year's standards. Traders said that while the central bank was apparently trying to use the mid-point to slow yuan appreciation, the market had, unusually, decided that the mid-point was unreasonably low and was resisting the central bank's guidance.
"The big dollar supply in the market may imply China's August trade surplus was large, and banks are expecting high inflation for the month," said a dealer at a Chinese commercial bank. August inflation data is due on Tuesday. The rate may have accelerated in August from July's 10-year high of 5.6 percent, Bi Jingquan, vice chairman of the National Development and Reform Commission, the country's top economic planner, told reporters on Tuesday.
One-year dollar/yuan non-deliverable forwards rose marginally to 7.1900/50 late on Tuesday from 7.1840/90 in late trade on Monday. The new level implied yuan appreciation from Tuesday's mid-point of between 5.01 and 5.08 percent in a year's time, against Monday's implied 5.09-5.16 percent.