Yuan offshore forwards rebounded on Tuesday from a steep drop the day before, lifted by light hedge fund buying while dollar short-covering eased after Chinese Premier Wen Jiabao made conciliatory remarks that China did not want "trade and currency wars" with the United States.
Wen said during a meeting with foreign business executives in Beijing on Monday that a top-level meeting between China and the United States in May would be very important for defusing strains between the two big economies. "Wen's comments have reinforced some investors' belief that China and the US should be able to reach compromises, paving the way for the yuan to resume appreciation possibly as soon as the second quarter," said a European bank dealer in Shanghai.
"These investors stopped covering shorts in the dollar today, although dollar buying interest was weak in a cautious mood." Dollar/yuan non-deliverable forwards (NDFs) were mostly higher across the curve late on Tuesday, with one-year NDFs bid at 6.6745, implying 12-month yuan appreciation of 2.27 percent measured from the Chinese central bank's daily mid-point, up from Monday's close of 2.11 percent.
The shorter end of the curve was also pointing to increased yuan appreciation, with three-month dollar/yuan NDFs bid at 6.7955, versus 6.7974 on Monday, and two-year NDFs at 6.4290 bid compared with 6.4340. The yuan regained its footing after suffering its biggest single-day fall in one-year NDFs on Monday since mid-November, propelled mainly by tough talk by China's Ministry of Commerce on Beijing's determination to stick to a stable yuan policy.
A trader at a European bank in Hong Kong said some hedge funds bought yuan on Tuesday, taking advantage of Monday's tumble, but others still wanted to cut their speculative positions, keeping NDFs largely range-bound. Traders expected limited scope for the yuan on the upside this week, with the one-year NDFs seen moving mostly within a narrow range of 6.65 to 6.68 against the dollar, barring any ground-breaking news.
China allowed the yuan to appreciate about 20 percent on the dollar from its July 2005 revaluation until mid-2008 but it has since repegged it near 6.83 to the dollar, aiming to protect Chinese exporters from the global financial crisis. Political pressure is growing in Washington to declare China a currency manipulator, with some US senators threatening to slap duties on Chinese products if Beijing does not allow the yuan, also known as the renminbi, to rise.
Chinese central bank governor Zhou Xiaochuan said in Mexico on Monday that China faced a tremendous task to create jobs, adding that too much noise about the yuan issue was not helpful. "You know this is very complicated," Zhou told reporters on the sidelines of an annual meeting of the Inter-American Development Bank in Cancun, Mexico.
"We can discuss on this issue what kind of global policy co-ordination ... but we don't think too much noise is helpful." Spot yuan closed at 6.8263 per dollar, nearly flat with Monday's close, after the Chinese central bank fixed the yuan's daily mid-point, or reference rate, at 6.8263 per dollar on Tuesday, little changed from the previous session's 6.8264.
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