The yuan closed higher against the dollar on Friday after the People's Bank of China surprised the market by fixing the mid-point at a post-revaluation high in an apparent move to create two-way trading. The yuan failed to reach or trade above the central bank's mid-point as banks and their clients were cautious that the PBOC could also pull the yuan back quickly in the same way as it pushes it higher, dealers said.
To strengthen two-way trading, the PBOC made the yuan rise 0.48 percent in the four trading days up to Tuesday as measured by the mid-point, after also using the weak mid-points to guide the currency 0.65 percent lower from August 9 to September 1. "Today's mid-point was a big surprise but also gave the clearest sign so far that the PBOC is creating two-way trading for yuan/dollar," said a dealer at a US bank in Shanghai.
"The market reacted with strong caution as the PBOC has guided the yuan up and down sharply in recent weeks," he said. "The yuan still has the potential to trade above its post-revaluation high in the near term, but will not move far away from the central bank mid-points."
The PBOC set the mid-point, or its reference rate from where the yuan can rise or fall 0.5 percent on the dollar each day, at 6.7625 on Friday, up from Thursday's 6.7817 and its highest level since the yuan's landmark revaluation against the dollar in July 2005.
Spot yuan finished at 6.7692 after touching an intraday high of 6.7659, up from Thursday's close of 6.7832 but failing to reach the PBOC's mid-point or breach the yuan's post-revaluation trading peak of 6.7644 hit on August 9.
The yuan is now up 0.84 percent from June 19, when the PBOC announced the abolition of a two-year peg to the dollar, compared with appreciation of as much as 0.91 percent on August 9. Offshore, dollar/yuan non-deliverable forwards (NDFs) fell sharply in response to the PBOC's unexpectedly high mid-point, which dealers said may been due to politics. "The move took the market by shock. I think it's more political in nature," says a NDF trader in Hong Kong.
Among other recent developments, US Treasury Secretary Timothy Geithner will present the Obama administration's latest view of what the United States should do to press China to reform its currency practices at a hearing next week. Benchmark one-year NDFs were bid at 6.6732 late on Friday, down from 6.6950 at Thursday's close, with their implied 12-month yuan appreciation rising moderately to 1.34 percent from 1.29 percent due to Friday's sharply stronger spot yuan mid-point. NDFs have become conservative in implying yuan appreciation since early August as the PBOC's new mode of two-way trading makes speculation on yuan appreciation increasingly difficult.
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