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China's yuan rebounded against the dollar in the spot and offshore forwards markets late on Tuesday, buoyed by the central bank's signal that it wanted the Chinese currency to stay broadly stable and by a global dollar correction in afternoon trade in Asia.
But reflecting uncertainty over the yuan's long-term prospects, one-year offshore dollar/yuan volatilities surged to a multiyear high for a second straight day, hitting an intraday high of 12.50 percent bid around midday before falling slightly to 11.75 percent in late trade, still up from Monday's intraday high of 11.50 percent.
"The central bank is using its mid-point system to signal that it doesn't want to see steep yuan depreciation (against the dollar) for now," said a dealer at a European bank in Shanghai. "This may help keep the yuan steady for a while. But the market is uncertain about the yuan's long-term trend because of China's slowing economy and falling asset prices."
One-year dollar/yuan non-deliverable forwards fell to 6.9800 bid in late trade against Monday's close of 7.0420. But bid/ask spreads remained extremely wide, at roughly three times their normal size.
NDFs' latest level implied yuan depreciation of 2.13 percent against the dollar over the next 12 months from Tuesday's mid-point, compared with 3.07 percent implied at Monday's close. Last month, the NDF market began implying 12-month yuan depreciation against the dollar for the first time in five years. Implied depreciation rose as high as 4.18 percent during the day on Monday.
With China expected to ease monetary policy soon - the central bank unexpectedly let the yield on its one-year bills fall nearly 10 basis points at auction on Tuesday - few are willing to bet on continued yuan appreciation. It fixed the yuan's mid-point against the euro much higher, at 9.2382 against 9.3303. Central bank governor Zhou Xiaochuan said in comments published on Monday that the central bank's current policy priorities were a stable currency and job creation.

Copyright Reuters, 2008

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