China's yuan experienced its most volatile day of trading on Tuesday since the 2005 revaluation, tumbling on tighter bank requirements for holding foreign exchange and later jumping back to gain 0.5 percent. The yuan initially slid in afternoon trade as banks scrambled to grab dollars after the new regulations by the foreign exchange watchdog caught them off guard, only for the Chinese currency to surge back for its biggest one-day rise since the revaluation.
Most of that activity happened in the last hour and a half of trade, during which the yuan first fell to the day's low, testing the lower edge of the daily trading band, and then surged to close at 6.6440 versus the dollar - up more than 0.2 percent from Tuesday's mid-point.
The spark for the volatility was the State Administration of Foreign Exchange's (SAFE) tightened forex rules that require banks participating in the currency market to hold a minimum amount of foreign currency overnight, as part of its efforts to curb inflows of speculative capital. Previously, the banks were required only not to hold short dollar positions overnight.
The heightened requirements for forex holdings contributed to the initial plunge in the yuan as banks bought dollars to abide by the rules, but it rose dramatically in the last hour of trade, amid rumours that the PBOC was intervening in the market to contain that rise. Still, around 10 traders polled by Reuters near the end of the session said that they saw no signs of clear intervention by the central bank.
Some traders said that two big Chinese banks were largely behind the market moves. "The PBOC appeared to be refraining from acting to check the yuan's movements," said a trader at an Asian bank in Shanghai. "It may like the yuan to be volatile to create an image of two-way trading - a weapon it has yearned for a long time to fight against speculation on a one-way, non-stop yuan rise."
In addition to the new forex holdings requirements, which took immediate effect, market participants were asked to fill in a new form to report their positions, in which forex forwards and swaps were listed separately, making them unable to shift positions between the two products. The PBOC has set a slew of surprising mid-points in either direction since it abolished the yuan's peg to the dollar on June 19, signalling its desire to create two-way trading to dampen expectations of one-way, non-stop yuan appreciation.
On Tuesday, the PBOC set the mid-point, or its reference rate from which the yuan can rise or fall 0.5 percent in a day, at 6.6580, stronger than Monday's 6.6692 and brushing aside a global dollar rebound.
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