The yuan rebounded against the dollar in the spot and offshore forwards markets on Tuesday after the Chinese central bank again signalled it did not want significant depreciation, despite weakness in other emerging market Asian currencies.
The South Korean won sank over 1 percent to near an 11-year low against the dollar early on Tuesday as worries about the global financial sector hit Seoul stocks. Intervention later helped the won rebound. During the won's early slump, the Chinese central bank set the day's yuan mid-point against the dollar at 6.8392, almost unchanged from Monday's 6.8389 and within the range of 6.8300-6.8399 that it has maintained since mid-December.
"Given the dollar's strength on global markets, today's mid-point was really stronger than expected and indicated the central bank's determination to keep the yuan stable, at least for now," said a dealer at a Chinese commercial bank in Shenzhen.
This view was backed up by Commerce Minister Chen Deming, who told reporters that China would keep the yuan stable despite the weakening currencies of some of its neighbours, and that he did not see any trend of even modest yuan depreciation.
Central bank officials also sounded as if China remained confident enough of an economic recovery to refrain from depreciating the yuan as a stimulus measure. Deputy central bank governor Liu Shiyu said that despite the threat of deflation, more data was needed before deciding whether to cut Chinese interest rates.
Another deputy governor, Su Ning, said: "The overall economic conditions are currently normal and we could very possibly see a recovery in the first half. We're confident about the economy." Spot yuan touched a low of 6.8468 in early trade, its lowest level since February 2, but closed at 6.8413, just off the day's high of 6.8406. It had finished at 6.8458 on Monday.
"There is now real pressure for the yuan to depreciate as China faces the same problems of slumping exports and falling asset prices as other Asian countries such as South Korea," said a dealer at a European bank in Shanghai. But the dealer conceded that the Chinese central bank, eager to avoid capital outflows or a cycle of depreciations of Asian currencies, remained unlikely to permit any extended yuan weakness for the foreseeable future.
Any policy change towards a weaker yuan is particularly unlikely during the annual session of China's parliament, which ends next week, because of the event's political sensitivity, the dealer added. The central bank's display of determination to keep the mid-point stable on Tuesday caused dollar/yuan volatilities to pull back.
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