Yuan flat

The yuan held steady against the dollar on Wednesday and is poised to trade narrowly in the near term - a prospect that pushed offshore one-year dollar/yuan volatilities to their lowest in nearly a year, dealers said. The benchmark volatilities fell to 5.00 percent bid at midday from 5.80 percent at Tuesday's close, their lowest level since May 27 last year, as the market increasingly expects the yuan to remain stable for a considerable period of time.
"The fall in the volatilities indicates that the market has become more unified in expecting a stable yuan in coming months," said a senior dealer at a North American bank in Shanghai. "However, the volatilities are likely to rise in coming weeks to imply strengthened expectations of yuan appreciation as China's economy is set to outperform all major global economies."
The volatilities were little traded in the first two years after China revalued the yuan in July 2005, but they then began rising steadily to forecast stronger yuan appreciation, reaching a market consensus level of 4 to 5 percent bid in early 2008. But the global economic crisis led China to rein in yuan appreciation in the third quarter of 2008, and offshore currency markets including the volatilities and non-deliverable forwards (NDFs) begin forecasting yuan depreciation.
Investors were afterwards sharply divided over the yuan's long-term outlook. One-year volatilities jumped as high as 16.75 percent bid on December 5, 2008 until early this month, when signs of China's economic improvements made the volatilities reverse its trend to imply yuan appreciation again.
Dealers said the benchmark volatilities would rise in the long run to imply more yuan appreciation if the Chinese economy shows further evidence of a recovery, but the vols might fall slightly first to the previous consensus level of 4-5 percent. Spot yuan was barely changed at 6.8247 versus the dollar at midday on Wednesday, compared with Tuesday's close of 6.8246.