The yuan closed almost unchanged against the dollar on Wednesday after trading in a narrow range as the market awaited a correction to pave the way for a new round of faster yuan appreciation.
The yuan finished at 7.9077 per dollar, compared with 7.9082 at the close on Tuesday. It moved in a tight range, hitting an intraday high of 7.9058 and a low of 7.9088. The People's Bank of China set the yuan's mid-point at a moderately stronger 7.9085 on Wednesday morning compared with its previous mid-point of 7.9110, giving few hints on the near-term trend of the Chinese currency.
"The market has seen a rough balance of supply and demand of dollars since the start of last week," right after a week-long holiday, said a dealer at a European bank. "Dollar buying has been strong whenever the yuan falls below 7.91, while its selling has been heavy when the yuan rises above 7.90, and that helps keep the yuan in a tight box."
Dealers said strong market expectations that the yuan would continue to appreciate at a faster pace seen in the second half of September had prevented it approaching 7.94/95, the level the market thought the central bank would like to see in order to encourage two-way trading.
Caution over a possible correction after the yuan hit repeated post-depegging highs in late September had also prevented the currency from breaching its September 28 level of 7.8954, its highest since Beijing revalued it by 2.1 percent and depegged it from the dollar in July 2005.
"The yuan must have a decent correction to digest its September gains," said a dealer at a Chinese commercial bank. "That could happen at any time depending on the dollar's performance on global markets, and after that, the yuan should have potential to stage one or a few rounds of fast appreciation before the end of this year."
Dealers said the yuan could move between 7.90 and 7.92 in coming days ahead of a correction that could see it fall as far as 7.94 to pave the way for an upward breakthrough. Beijing needs to use the currency as a weapon to cut a huge trade surplus and surging foreign exchange reserves, among other steps to cool a racing economy.
Market talk lingers that the central bank is likely to widen the yuan's trading range in the near future to make it easier for the yuan to appreciate at a faster pace, dealers said.
Globally, the dollar fell against the yen on Wednesday after a newspaper reported that the Bank of Japan planed to increase its monitoring of carry trades, which had helped push the Japanese currency to 10-month lows against the dollar. One-year onshore yuan/dollar swaps were quoted at 2,060 pips, suggesting the yuan will be up 2.67 percent in a year's time against its mid-point on Wednesday, according to the China Foreign Exchange Trade System. One-year offshore non-deliverable forwards quoted the yuan at 7.6402/7.6502 to the dollar, forecasting a yuan rise of 3.38 to 3.51 percent.