Chinese yuan falls from near post-reval high

China's yuan fell against the dollar on Monday from near a post-revaluation high hit on Friday, as the Chinese central bank again guided the yuan lower.
But non-deliverable forwards showed a significant increase in expectations for long-term yuan appreciation, as some banks bet Chinese authorities would ultimately use yuan strength more actively against rising inflation, which jumped to a fresh 10-year high in August.
Before trade began, the central bank set the yuan's spot mid-point at 7.5109, down from Friday's 7.5050. This was widely seen as a signal that despite the dollar's continued weakness in global markets, the central bank did not want the yuan to break above 7.5000 soon - possibly not this week.
"After the yuan hit its new high, people are getting a little more cautious, and the central bank doesn't want to see a new high every day either," said a dealer at an Asian bank in Shanghai.
The yuan closed at 7.5106, well off Friday's post-revaluation high of 7.5025 and Friday's finish of 7.5036. It remained much stronger than its mid-point for most of the day but fell steeply in the last half-hour.
Trade was very light, partly because Chinese commercial banks usually prefer to hold yuan instead of foreign currencies during long holidays, traders said. A week-long national holiday starts on October 1.
A yuan funding squeeze in China's domestic money market, due to the approach of the holiday as well as huge equity IPOs, also supported the yuan. But traders said the central bank last week required some Chinese banks to boost their dollar holdings, apparently in a form of indirect intervention to limit yuan appreciation, and this may have contributed to the yuan's weakness on Monday.
Last week, the central bank permitted the yuan's relatively sharp rise only because of the dollar's sharp fall to fresh lows against the euro and other major currencies, dealers said. Unless the dollar continues falling sharply abroad, the yuan is unlikely to appreciate much further in the near term, they said. However, dollar/yuan NDFs fell on Monday, showing the market did not believe the central bank would choose to restrain yuan appreciation for long.