China's yuan posted its largest post-revaluation rise against the dollar on Thursday, boosted by a weaker dollar on overseas markets and renewed speculation that the central bank might allow a new round of yuan appreciation.
The yuan closed up 0.25 percent at 7.9686 to the dollar versus Wednesday's close of 7.9885. It was the biggest daily percentage gain since the currency was depegged from the dollar in July 2005.
The central bank appeared to be largely absent from the market and the yuan closed just marginally off its intra-day high of 7.9685.
Many traders have now concluded that this week's unprecedented volatility, which saw the yuan post its largest daily post-revaluation fall of 0.28 percent on Tuesday, may have been encouraged by the central bank to prepare the market for yuan appreciation.
If the central bank can use greater volatility to introduce two-way trade and a feeling of risk on both sides of the exchange rate, it may find it easier to have the yuan appreciate in a controlled manner, as part of its drive to cool the economy.
Some traders said the yuan would likely test its post-revaluation peak of 7.9650, first hit on July 31, next week.
"You never know, we could see a surprisingly big jump of the yuan now that there is no reason to bet on another rate hike in the US next month," said a trader with a European bank. Wednesday's weak core US CPI figure dampened expectations of another US rate hike.
Going by past multi-week periods of appreciation since the start of this year, some traders think a yuan rise to the 7.90 area is possible in coming weeks. Any large, one-off revaluation remains extremely unlikely, they believe.
The 7.9650 level is quite strong short-term technical resistance for the yuan because the Chinese currency has retreated from there three times since late July. Gains should therefore slow as the yuan nears that level, some traders said.