SHANGHAI: The yuan slipped against the dollar on Wednesday, hovering near its limit-down level from the mid-point fixed by the People's Bank of China, but it has still risen slightly so far this month, buoyed by a slew of strong fixings by the central bank.
The PBOC set the dollar/yuan mid-point slightly weaker on Wednesday, but the weakening in the fixing lagged far behind a strong rally in the US Dollar Index overnight, when the index hit its highest level since early 2011.
Traders said the fixing indicated that the government's intention was to maintain the stability of its currency for now.
"Signs are clear that the PBOC doesn't want the yuan to depreciate or appreciate for now amid economic uncertainties both at home and abroad," said a senior trader at an Asian bank in Shanghai.
"The government is doing something similar to what it did during the 2008 financial crisis." Spot yuan was trading 6.3702 against the dollar at midday, down slightly from 6.3652 at the close on Wednesday and very close to its daily limit-down level of 6.3713 from the PBOC's fixing.
The currency has still risen 0.14 percent since the start of December when it began to hit limit-down levels nearly every day as global dollar strength and yuan short selling by offshore investors made banks and their clients buy more dollars in the domestic market, the China Foreign Exchange Trade System.
Unlike price movements for an overwhelming majority of products in global markets that compare a day's quotes with the previous day's closing levels, the yuan's trading limit levels are set against the PBOC's mid-point.
The yuan is not freely convertible under the capital account and the PBOC uses the reference rate to control the yuan's movements on behalf of the government.
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Before trading began on Wednesday, the PBOC fixed the day's dollar/yuan mid-point at 6.3396, slightly weaker than Tuesday's 6.3359 and compared with a 0.9 percent rally in the dollar index.
The PBOC has recently been trying to keep the yuan stable by setting higher mid-points. The yuan is permitted to fluctuate within 0.5 percent of either side of the mid-point in a day.
The government appears to be moving toward a tightly managed range for yuan trade in a bid to ward off depreciation speculation as its export momentum slows and there are initial sings that capital may be flowing outside the country.
Until mid-November, a combination of international pressure from China's trade partners to revalue the yuan to balance global trade and China's own needs to manage inflation had pushed the currency steadily higher.
The yuan has risen as much as 4.01 percent from the start of this year to mid-November; it has risen 3.45 percent so far this year.
"The PBOC has given clear signs that it won't allow the yuan to depreciate sharply despite global economic uncertainties," said Liu Dongliang, currency analyst at China Merchants Bank in Shenzhen.
"The trend for the yuan to appreciate has not reversed," he said. "Once the global economy stabilises, the yuan will resume rising as China has laid increasing emphasis on imports."
Offshore, however, benchmark one-year dollar/yuan non-deliverable forwards (NDFs) have largely been forecasting yuan depreciation in a year's time since late September, reversing a general trend of appreciation since the yuan's revaluation in July 2005.
One-year NDFs rose slightly to 6.4390 on Wednesday against 6.4300 at the close on Tuesday, implying that the yuan will depreciate 1.54 percent in 12 months from Wednesday's PBOC mid-point, compared with a 1.41 percent fall implied on Tuesday.
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