Yuan ends little changed

The yuan was little changed against the dollar in the spot and offshore forwards markets on Wednesday despite much weaker-than-expected Chinese trade data, as many dealers said Beijing remained very unlikely to change its stable currency policy.
Exports plunged 25.7 percent from a year earlier in February, shrinking Chinas trade surplus to $4.84 billion from $39.1 billion in January. Economists had expected a $27.3 billion surplus based on a 5.0 percent fall in exports.
"This data accords with our view that Chinas status as a source of regional currency stability is under pressure," HSBC said in a report, adding that the market would increasingly worry about Chinas role as an anchor for the region. "While we expect China to persist with keeping the spot exchange rate in a narrow range, for now, the calls for depreciation onshore are likely to only gather momentum."
HSBC said recent weakening of the yen had left China with the strongest trade-weighted currency in the world, which would pressure the yuan in the non-deliverable forwards market; owning one-year dollar/yuan NDFs looks attractive, it said.
Reflecting such worries, one-year dollar/yuan volatilities were up at 8.15 percent bid in late trade from 7.50 percent at Tuesdays close. But many onshore traders said weak exports were still extremely unlikely to force China to change its policy of maintaining currency stability any time soon. It has used its mid-point system and indirect intervention when needed to keep the yuan in a range of 6.81-6.88 against the dollar since last July.
Statements by the central bank governor and other top officials in recent weeks have indicated this policy is key to Chinas strategy in riding out the global financial crisis. "Macroeconomic figures released this week are very much mixed, but the numbers are secondary factors for the market," said a dealer at a major Chinese state-owned bank in Beijing.
"The most important factor, of course, is government policy. Few believe China will change its stable currency policy for now, with the global crisis creating so much uncertainty for global and domestic economies and markets." Spot yuan, which hit an intra-day high of 6.8384 against the dollar before the trade data, fell to a low of 6.8432 afterwards.
But reflecting the belief that the central bank would not let the market use the data as a cue to push down the yuan, the Chinese currency rebounded in the last half-hour of trade to finish at 6.8404, up marginally from Tuesdays close of 6.8412.
One-year dollar/yuan NDFs rose as high as 6.9813 bid from Tuesdays close of 6.9545, but later pulled back to 6.9650. That level implied yuan depreciation of 1.87 percent over the next 12 months from the days mid-point, barely changed from 1.71 percent implied at the close on Tuesday.