Yuan falls in NDFs

China's yuan fell against the dollar on Friday in offshore non-deliverable forwards while volatilities rose, as a global surge of the US currency to a 19-month high cast a shadow over the yuan's long-term trend. The US Dollar Index touched a high of 88.364 points against a basket of major world currencies in Asian trade on Friday, its highest since April 2007, although it had fallen back nearly 1 percent from Thursday's close by early European trade.
The dollar's strength pushed offshore one-year dollar/yuan non-deliverable forwards above the psychologically important 7.0000 mark on Friday to a high of 7.0400 in afternoon trade, up from Thursday's close of 6.9950 and their highest intraday level since November 3. Friday's high implied yuan depreciation of 2.96 percent from the day's spot mid-point over the next 12 months, up from 2.35 percent implied at Thursday's close.
Dealers said news that a US panel was urging congress to pass legislation next year to pressure China to raise the yuan's value had no impact on trading but it might signal a harder line on the issue in the forthcoming Obama Administration.
"As a direct result of its currency manipulation and the capital controls which China employs, the People's Bank of China now has the largest hoard of foreign currency reserves in the world: nearly $2 trillion," Larry Wortzel, chairman of the US-China Economic and Security Review Commission, said in prepared remarks.
The commission made its recommendations as President-elect Barack Obama is preparing to take office on January 20 after promising to increase currency pressure on China. "Dealers here don't much believe in politicians' talk and the news had no impact on trading today," said a trader at a European bank in Shanghai.
"But the news does reflect some US political forces using the transition to a new administration to exert fresh pressure on China's currency policy," he said. Spot yuan reversed early losses to close slightly higher on Friday, taking its cues from a dollar correction on the global markets in early European trade, dealers said.
It finished at 6.8311 against the dollar, up from 6.8345 at Thursday's close after touching an intraday high of 6.8305 in late trade and a low of 6.8372 early. The Chinese central bank set the yuan's daily mid-point at 6.8317 on Friday compared with Thursday's 6.8307, partially reflecting overnight dollar strength.
Increased uncertainty over the outlook for several Asian currencies helped offshore one-year dollar/yuan volatilities rise to 12.30 percent bid in late trade on Friday from Thursday's close of 12.20 percent. But the market appeared to remain less concerned about the possibility of yuan depreciation than in October, when one-year volatilities hit a multi-year intraday high of 15.50 percent and 12-month implied yuan depreciation exceeded 5 percent.