China's yuan set a fresh one-month low against the dollar on Wednesday in response to a surprisingly weak mid-point set by the Chinese central bank before trade began. The yuan slipped to as low as 7.5880 in the opening minutes from Tuesday's close of 7.5760, after the central bank set a mid-point of 7.5921, down from 7.5845 on Tuesday. It closed at 7.5858.
However, the yuan continued to trade stronger than its mid-point, suggesting much of the market believed the Chinese currency was not starting an extended downtrend.
Traders attributed Wednesday's lower mid-point largely to a rebound of the dollar against the euro in global markets on Tuesday. But they also said the central bank appeared more determined than previously thought to prevent yuan appreciation in the immediate term.
The central bank has now set the mid-point lower for four straight days, and the 0.36 percent drop in the mid-point over that period is the second-biggest four-day fall since the yuan was revalued in July 2005. The largest four-day fall of the mid-point occurred in early June this year.
Through its use of the mid-point, the central bank has not permitted any significant yuan appreciation for more than a month, and 14-day momentum behind the yuan's appreciation has fallen to its lowest level in more than a year. Far from accelerating yuan appreciation to fight rising inflation, as many analysts have speculated it would, the central bank seems to want to keep the yuan broadly stable for now to deter speculation during a period of global market volatility and trade tensions with the United States, traders said.
In response to this prospect, one-year non-deliverable dollar/yuan forwards climbed to 7.1650/7.1690 late on Wednesday from Tuesday's 7.1390/7.1430 - their biggest daily rise since May last year.
That implied yuan appreciation of between 5.90 and 5.96 percent from the day's mid-point in a year's time, against 6.18-6.24 percent appreciation implied by NDFs at Tuesday's close.
However, many traders continued to view the pause in the yuan's appreciation as a short-term phenomenon, and said the central bank might simply be creating the conditions, which would allow a rapid leg up in the yuan at sometime in the future.
"The central bank aims to increase volatility in the market instead of having the yuan appreciate at the same pace all the time," said a US bank trader in Shanghai. Some traders, therefore, think the yuan may still test its post-revaluation high of 7.5543, hit on July 25, in coming weeks.