SHANGHAI: The yuan slipped on Tuesday as strong dollar demand from corporates and less-than-usual year-end dollar sales offset a record high mid-point fixed by the People's Bank of China, traders said.
The central bank set an all-time high dollar/yuan mid-point in an apparent hope to let the yuan rise a little more at the end of 2011 so as to make the yuan's full-year nominal appreciation look bigger, traders said.
It is the same tactic it used at the end of last year when the PBOC also let the yuan appreciate slightly to cope with US pressure for the yuan to appreciate.
The central bank engineered a 0.5 percent yuan appreciation in the last two weeks of 2010, before letting it pull back in the new year. The yuan, which gained 3.6 percent in 2010, is on track to a rise more than 4 percent in 2011.
"Sentiment has changed a lot this year," said a trader at a European bank in Shanghai. "Unless the PBOC is determined to pump more dollars into the market, the yuan may not stage as decent a rise as it did at the end of last year."
Spot yuan was trading at 6.3268 against the dollar at midday on Tuesday, down slightly from 6.3198 at the close on Monday, when it hit a record high of 6.3160.
The PBOC set the dollar/yuan mid-point at an all-time high of 6.3152 on Tuesday, compared with Monday's 6.3152.
Traders said many companies believed that the yuan has little room to appreciate after the new year starts, so they are building dollar positions taking advantage of a relatively firm yuan.
In contrast with the previous year-end, when expectations of yuan appreciation prompted companies to rush to sell dollars on hand, firms had became more reluctant to sell dollars this year on void of yuan appreciation prospect, traders said.
SHORT-TERM STABILITY SEEN
Traders believe the yuan will likely to remain stable in the first few months of 2012 as China needs time to gauge the impact of global economic weakness, caused mainly by the euro zone debt crisis, on its exports.
For all 2012, the yuan is still expected to appreciate as China is faced with the US pressure to rebalance bilateral and world trade while it continues recording trade surpluses.
But its appreciation rate is expected to drop to around 3 percent in 2012, with most of the rise expected in the second half.
The yuan has appreciated 4.2 percent so far this year, with most of the gain being recorded in the first 10 months of the year as China tries to rebalance trade and use the currency to help fight high inflation.
While the government has recently halted yuan appreciation amid slowing exports, it also seems to be wary of a weaker yuan that may lead to capital outflows.
The PBOC has thus effectively kept the yuan in a range of 6.3 to 6.4 against the dollar since early November -- a trend traders say they believe to continue well into 2012.
In contrast, offshore benchmark one-year non-deliverable forwards (NDFs) have largely been forecasting a yuan depreciation in a year's time since late September, reversing a general trend of predicting an appreciation since the yuan's revaluation in July 2005.
One-year NDFs rose to 6.3795 on Tuesday against 6.3750 at the close on Monday, implying that the yuan will depreciate 1.01 percent in 12 months from Tuesday's PBOC mid-point, compared with a 0.94 percent fall implied on Monday.
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