The yuan was little changed on Wednesday with uncertainty about the eurozone debt crisis keeping the market on hold. Relatively small changes in the central bank's daily fixings over the last week, despite the spot rate trading 0.6-0.8 percent weaker, suggest that authorities are willing to tolerate a moderately weak yuan, traders say.
The People's Bank of China (PBOC) set its midpoint 21 pips stronger at 6.3271 on Wednesday after the dollar weakened slightly overnight. The PBOC expanded the yuan's allowable trading band against the dollar in mid-April, allowing it to rise or fall 1 percent every day, compared to 0.5 percent previously. The yuan had its weakest month on record in May, falling nearly 1 percent, and has hovered near that level in early June. The currency closed at 6.3691 per dollar near midday on Wednesday, 12 pips stronger than Tuesday's close and one pip weaker than the end-May close.
The yuan has now fallen 1.18 percent so far in 2012. China continues to run "twin surpluses" in trade and investment, but the have narrowed compared to previous years. Offshore spot yuan traded at 6.3705 in late afternoon, essentially in line with the onshore rate. Despite the wider band, a series of markedly stronger midpoints - perhaps accompanied by behind-the-scenes yuan buying by the PBOC - could still pull the yuan's value higher, if authorities chose to take such steps.
But traders say the central bank is increasingly willing to let the yuan rise and fall in line with other global currencies. "They are letting the market play a larger role in setting the exchange rate. The broad trend recently is for the dollar to strengthen and other currencies to weaken, so the yuan is also following this trend," said a trader at a joint-stock bank in Shanghai. Traders and analysts say that additional corporate activity - not reflected in China's balance of payments data - is also weighing on the yuan this year.
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