China's yuan opened higher against the dollar on Tuesday but came well off its highs by the close as some banks continued to work their way out of Monday's dollar short squeeze, traders said.
The yuan finished at 7.9995, up from Monday's close of 8.0027 but far from Tuesday's intra-day high of 7.9940. On Monday, the yuan suffered its largest fall in weeks because of a dollar short squeeze, and some short-covering continued on Tuesday.
"This week the yuan's movements haven't been linked closely to the dollar in foreign markets. Supply and demand within the market has been the main factor, and recently it seems the big banks have been short of dollars," said a trader at a Beijing bank.
Although some analysts are talking of a widening of the 0.3 percent trading band in the third quarter of this year, many traders think Beijing is unlikely to abandon its conservative approach so soon.
Stephen Green, senior economist at Standard Chartered in Shanghai, said in a research note on Tuesday that it would make no sense to widen the band because it already allowed for appreciation. "Get used to the idea of a gradual CNY appreciation with a little bit more volatility," he said.
Actual outflows will initially be small and may not actually take place for some months, but the news reminded the market that Beijing plans to engineer increased forex outflows to offset pressure for a yuan appreciation.
The central bank's setting of a strong yuan mid-point of 7.9935 on Tuesday showed it does not want to see major yuan weakness, so the yuan's medium-term uptrend remains intact, they said.