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The yuan fell moderately against the dollar in the spot and offshore forwards markets on Friday, but the Chinese central bank helped to stabilise the spot market once again by setting a nearly flat reference rate. Before spot trade began on Friday, the central bank fixed the yuan's daily mid-point against the dollar at 6.8327, little changed from Thursday's reference rate of 6.8310. It has kept the mid-point almost flat throughout this week.
"The apparent decision by the central bank to keep the yuan stable has now become the key factor in the forex market," said a dealer at a major European bank in Shanghai. "Also, trading is still largely based on real demand, which is limiting the impact from a plunging stock market and the liquidity shortfall in the yuan interbank money market."
Spot yuan closed at 6.8357 to the dollar on Friday, down from Thursday's finish of 6.8205. Traders said it would have fallen much more if the central bank had not set a steady mid-point. Dealers also said major state-owned banks had occasionally done large deals this week that had the effect of keeping the spot yuan rate relatively stable.
Such banks sometimes trade on behalf of the central bank, so several dealers suspected indirect intervention by the central bank. Many traders said the central bank appeared to be hoping to keep spot yuan in an informal trading range of roughly 6.82 to 6.85 until the global financial crisis showed signs of easing.

Copyright Reuters, 2008

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