SHANGHAI: China's yuan strengthened slightly on Monday after the central bank set a stronger midpoint, but banks remained reluctant to test the widened trading band, which regulators increased to 1.0 percent from 0.5 percent as of April 16.
Spot yuan opened at 6.3050 per dollar, 35 points firmer than Friday's close and was trading around 6.3069 by midday.
Before trade began, the People's Bank of China set the yuan's midpoint to the dollar at 6.2970, 72 pips stronger than Friday's fix, in response to a slight weakening in the dollar index late last week. The dollar index fell to 79.184 at Friday's close from 79.561 at end of Thursday.
A trader at a state-owned bank said that market liquidity remained ample but trading activity was light.
The yuan continued its habit of starting out trading below the midpoint, as it has done since mid-March. Market players say the phenomenon indicates traders' relatively conservative attitude toward the midpoint fixing, as opposed to any structural pressure for depreciation. Spot yuan has remained within close range of the midpoint - around 0.2 percent - throughout the period.
By midday, the yuan had only moved 0.015 percent away from its morning fixing.
The yuan bounced back following reports that Chinese factory activity had stabilised in April, but spot yuan remained below the midpoint. The HSBC Flash Purchasing Managers Index, the earliest indicator of Chinese industrial activity, showed a mild recovery in output and export orders.
The furthest distance the yuan has traded away from the midpoint since the widened band was implemented was 0.22 percent, which occurred on April 16, the day the new policy was put into effect.
"This is not the central bank controlling things in the backgound," said a trader at a joint-stock bank. "The banks themselves are still cautious about testing the new range."
A trader at a state-owned bank concurred that the range-bound trading was not in response to policy guidance. "Just because the system is more market-driven now does not mean volatility must be high," he said.
One year non-deliverable yuan forwards (NDFs) also strengthened slightly on Monday but remained weaker than spot yuan, trading at 6.3370 by midday. Market players say NDFs are no longer reliable indicators of market expectations for the yuan's future value. The yuan touched 6.3471, its weakest point of the year, on March 14, after a series of progressively weaker midpoints in early March. The central bank then reversed course, guiding the currency higher over the next week with stronger fixings to a high of 6.2840 on March 27, a net spread of 0.99 percent.
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