HONG KONG: China's yuan firmed against the dollar on Monday despite a slightly weaker midpoint set by the central bank.
The People's Bank of China set the midpoint rate at 6.1402 per dollar prior to market open, weaker than the previous fix 6.1397.
The spot market opened at 6.2130 per dollar and was changing hands at 6.2119 near midday, 48 pips stronger than the previous close and 1.17 percent weaker than the midpoint.
The spot rate is currently allowed to trade with a range 2 percent above or below the official fixing on any given day.
Market participants remain cautious on the yuan's performance in the coming months as weak economic indicators from China shows the world's second-largest economy still needs further supportive measures from the government.
Earlier this month, suspected intervention by the central bank to strengthen the yuan persuaded some investors to trim short positions on the currency, according to a Reuters survey of 12 currency analysts from banks and asset management companies.
The offshore yuan was trading 0.04 percent weaker than the onshore spot rate at 6.2141 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 6.3665, or 3.55 percent weaker than the midpoint.
One-year NDFs are settled against the midpoint, not the spot rate, and now that the trading band has been widened to 2 percent in either direction, corporates are much warier of using the NDF to hedge given the basis risk inherent in them.
As a result the market has lost liquidity in recent years and has frequently proven an unreliable measure of market sentiment.
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