The yuan rose near its post-revaluation high against the dollar on Wednesday as dealers speculated the central bank might permit some yuan strength before the maturity of its first dollar-yuan swap deal.
On November 25 last year, the central bank conducted a landmark $6 billion swap with ten domestic banks, selling dollars at around 8.0810 yuan and undertaking to buy them back a year later at 7.85, according to market sources.
In order to prevent either side of the transaction from facing a significant notional loss on the deal, the central bank may want the yuan spot rate against the dollar to be near 7.85 when the swap matures this weekend, traders said.
"The yuan could rise slightly for the rest of this week as the central bank will lack the motivation to push it down at this moment," said a Shanghai dealer at a European bank.
The yuan was trading at 7.8636 to the dollar, up from Tuesday's finish of 7.8710. It hit an intra-day high of 7.8628, close to its post-revaluation high of 7.8623 on November 13. The yuan is likely to stand at around 7.8600 at the close on Friday, dealers said. Meanwhile, 7.8800 is good technical support, as the yuan has bottomed there twice this month.
The yuan has fallen nearly every day since November 13 as the central bank has intervened to soften the Chinese currency, apparently seeking to correct excessive expectations for appreciation, dealers said. But on Wednesday morning, the central bank set the yuan's daily mid-point at a higher 7.8655 against Tuesday's 7.8695. This reflected global dollar weakness but was also seen as a sign that the bank might allow the yuan to firm a little, dealers said.