SHANGHAI: The yuan fell versus the dollar on Wednesday, and has weakened 0.68 percent this month as the People's Bank of China (PBOC) widens the currency's trading band via its mid-point.
While the PBOC has talked about a widening of the yuan/dollar trading band for years without matching words with deeds, it appears to be serious this time.
The mid-point has had its second-biggest 10-day loss since China established a domestic foreign exchange market in 1994.
In the government's clearest signal that it is ready for two-way trading of the yuan, Chinese Premier Wen Jiabao said on Wednesday that China will intensify reforms of its currency regime and allow the yuan to float more freely.
"In the Hong Kong market, NDFs have started to fluctuate both ways. This tells us the yuan is possibly near a balanced level," Wen told a news conference on the last day of the 2012 National People's Congress meeting.
Still, for now the PBOC keeps a tight grip of the yuan's value, with its midpoint largely deciding the yuan's direction and the extent of a daily fall or rise, while the yuan has continued trading in a relatively narrow range.
Dealers said the market may well lose its direction if the PBOC loosens its grip immediately because Chinese companies have never been given the right to price the currency.
As a result, any reforms of the yuan's pricing mechanisms will take time, dealers said, warning against possible excessive interpretation of the recent yuan depreciation.
"The PBOC appears to be really doing something this time to let the yuan move more widely," said a dealer at Chinese commercial bank in Shanghai.
"But it has not nudged from the position that it is only the central bank that decides the value of the yuan," he said.
"So at least for now, you still cannot look at the market to see the direction of yuan movements. You still have to guess the PBOC's intention."
Spot yuan was trading at 6.3364 against the dollar at midday, weaker than 6.3270 at Tuesday's close and dropping 0.68 percent from 6.2936 at the end of last month -- exactly the amount of loss the PBOC has permitted for its midpoint in the same period of time.
PBOC IN FOCUS
Before Wednesday's trading began, the PBOC set the yuan's midpoint at 6.3328, weaker than Tuesday's 6.3259. The PBOC's fixing has lost 0.68 percent over the past 10 trading sessions.
The midpoint is the daily base rate from which the yuan can rise or fall 0.5 percent in a day, used by the PBOC to help express the government intentions for the yuan's value.
Offshore, benchmark one-year dollar/yuan non-deliverable forwards (NDFs) started to imply yuan depreciation late on Tuesday and implied a yuan fall of 0.17 percent at midday compared with a fall of 0.10 percent implied at Tuesday's close.
The spread of the spot yuan traded in Hong Kong and in the mainland exchange in Shanghai narrowed to only 16 pips from 125 pips at the close on Tuesday.
Dealers trading in the domestic market warned that the greater volatility of yuan/dollar trading will not automatically lead the yuan to depreciate against the US dollar.
The yuan is still expected to appreciate this year, although the pace in the first half may slow due to China's weakening export growth, they said.
The currency is expected to rise 0.7 percent in the first half, less than half of the 1.9 percent pace seen in the same period last year, traders said.
While the central bank is likely to allow the yuan to stage more swings in coming months, traders expected the currency to move mainly in a range of 6.25 to 6.35 per dollar, and end the first half at around 6.25.
Many traders believe the government sets undisclosed targets for the yuan's exchange rate to help it manage the economy.
Comments
Comments are closed.