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China's yuan rose against the dollar on Tuesday after the central bank set its daily reference rate at a higher level, signalling it did not want a downtrend in the Chinese currency. Despite a substantial gain by the US Dollar Index on Monday, the Chinese central bank set the yuan's mid-point against the dollar at 6.8399 before trade began on Tuesday, up from Monday's 6.8455.
That helped push up the yuan to a high of 6.8380 in early trade, and it closed at 6.8381, well above its previous finish of 6.8433. "Even though yuan appreciation has slowed down significantly in the past few months under the guidance of the central bank, the central bank is apparently not ready to see depreciation," said a trader with a major European bank in Shanghai.
One-year offshore dollar/yuan non-deliverable forwards fell slightly to 6.7550 in late trade from 6.7740 at Monday's finish. Their latest level implied yuan appreciation of 1.26 percent against the dollar in the next 12 months from the day's spot mid-point, up from 1.06 percent on Monday.
After soaring early this month as the market scaled back expectations for long-term yuan appreciation, NDFs have largely moved sideways for the past few days, suggesting the market has become comfortable with levels of implied 12-month appreciation between about 0.5 and 1.5 percent. One-year dollar/yuan volatilities, at 7.90 percent bid late on Tuesday, have dropped back from a multi-year closing high of 8.45 percent hit last Wednesday, indicating uncertainty over the yuan's trend has partially eased.

Copyright Reuters, 2008

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