The yuan held steady on Tuesday after the central bank set a stronger mid-point, sending a strong signal that global movements in the dollar will be the dominant factor in guiding the yuan's value in the near term. The dollar traded slightly weaker overnight, prompting the People's Bank of China (PBOC) to set a stronger mid-point, following three days in which a rising dollar was met with weaker mid-points.
Spot yuan closed at 6.3150 on Tuesday, 4 pips weaker than Monday's close of 6.3146. The PBOC will continue to let the direction of the dollar index determine the trend in its daily fixings in the near term, traders said. The two rates generally move in opposite directions.
"Looking at the last several trading days since the New Year, the link between the mid-point and the dollar index has been quite high," said a foreign exchange trader at a city commercial bank in Shanghai. The trend indicates that the government's stated policy of keeping the yuan exchange rate "basically stable" does not refer exclusively to the yuan-dollar rate, but rather to the yuan's value against a broader basket of global currencies.
Traders expect that spot yuan will trade in a narrow range for the next several weeks. The spot rate has hovered slightly above the central bank's mid-point in the first few days of the year, a shift from the end of 2011, when the yuan consistently traded below the fixing. In the offshore non-deliverable forwards market, one-year NDFs tracked the onshore movement, reaching 6.3220 in late afternoon on Tuesday, 80 pips stronger than Monday's close.
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