Chinese yuan guided up

The yuan closed higher against the dollar on Monday, guided by a stronger mid-point set by the Chinese central bank, which appeared to be taking its cue from calmer global markets, traders said.
"We believe the central bank has seen that the US subprime crisis is now basically over, and that it's the right time to permit the yuan to rise again," said a dealer at a major Chinese commercial bank.
The yuan finished at 7.5604 to the dollar, up from 7.5666 at the close on Friday. It has gained 0.52 percent over the past three trading days - its largest three-day percentage rise since it was revalued in July 2005. The yuan is now within arm's reach of its post-revaluation high of 7.5543, hit on July 25. Several dealers said the yuan was poised to breach that level this week.
The central bank set a stronger daily yuan mid-point of 7.5629 on Monday, up from 7.5691 on Friday, when it allowed the reference rate to post its fourth-largest daily gain since the revaluation.
Through its use of the mid-point, the central bank had blocked yuan appreciation for six weeks through last Wednesday, waiting to see whether the US subprime crisis would hurt the world economy and therefore Chinese exports.
But as global stock markets stabilised amid other signals that the worst of the credit squeeze might be over, the central bank began last Thursday to permit yuan strength to resume.
The central bank hiked interest rates last week to fight inflation and traders said it was probably keen to see a strong yuan help to dampen inflation. However, dealers in the domestic market said they were not so far raising their expectations for how much the central bank would permit the yuan to gain in the longer term.
They were maintaining their forecasts for the yuan to rise around 5 percent for all of 2007, against 3.4 percent in 2006. The currency has risen 3.24 percent so far this year.
Similarly, longer-term offshore non-deliverable forwards did not show any strengthening of expectations for yuan appreciation on Monday. One-year dollar/yuan NDFs edged down to 7.1930/1980 in late trade from 7.1960/2000 on Friday. This implied yuan appreciation from Monday's mid-point of between 5.07 and 5.14 percent in a year's time, down slightly from Friday's implied 5.13-5.18 percent. A couple of weeks ago, implied appreciation was above 6.0 percent.