Yuan strengthens

China's yuan strengthened against the dollar on Wednesday as greenback sales by major state-owned banks eclipsed corporate demand for it, though traders were wary of the outlook amid uncertainty over Beijing's policies on the local currency. The People's Bank of China (PBOC) fixed the yuan midpoint lower for the third day in a row on Wednesday to 6.7922 per dollar prior to the market opening, weaker than the previous fix at 6.7889.
In the spot market, the yuan opened at 6.7995 per dollar, and then rose to a high of 6.7923 before retreating to 6.7952 at midday, 53 pips firmer than the previous late session close but 0.04 percent weaker than the midpoint. The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 94.54, firmer than the previous day's 94.52.
The global dollar index fell to 96.168 from the previous close of 96.218. The offshore yuan was trading 0.01 percent firmer than the onshore spot at 6.7946 per dollar. Offshore one-year non-deliverable forwards contracts (NDFs), considered the best available proxy for forward-looking market expectations of the yuan's value, traded at 6.964, 2.47 percent weaker than the midpoint.
One-year NDFs are settled against the midpoint, not the spot rate. Traders said corporate dollar demand remained strong on Wednesday, but most market participants were cautious due to recent volatility in the Chinese yuan and dollar sales by state banks. On Wednesday, multiple traders said they saw major state-owned banks selling dollars in the market to prop up the yuan, as happened on Tuesday.
This trend by state-owned banks has persisted over the past two months in what traders believe is part of official efforts to stabilise the Chinese currency and flush out overly bearish yuan bets. "The spot yuan movement in the near term largely depends on the authorities' attitude, rather than the performance of the US dollar," a Shanghai-based trader at a Chinese bank said.
The months of June and July are usually characterized by high corporate dollar demand as some Chinese companies purchase the US currency to pay dividends to their shareholders overseas. Noting that the yuan had strengthened against the dollar in June, Rob Carnell, head of research at ING, said the PBOC has sent strong signals to the market that it "prefers appreciating currency".