China's yuan rose moderately against the dollar on Monday after the central bank set a stronger mid-point for the first time in seven days, apparently ending an effort to guide the currency lower.
But traders said the stronger mid-point seemed to be a response to softness of the dollar against major world currencies, rather than a signal that the yuan would immediately resume appreciating at the pace seen in the first half of 2007.
"Monday's mid-point is still much weaker than the yuan's exchange rate in early August, implying the central bank has yet to allow the yuan to resume its appreciation," said a Shanghai dealer at a North American bank. "But it seems the central bank may feel it's the right time to halt the yuan's weakening, after its big drop last week."
The yuan closed at 7.5871, up from Friday's finish of 7.5951, after surging in the final half-hour of trade above 7.5900, which had been the morning's ceiling. Before trade began, the Chinese central bank set a daily mid-point of 7.5973, up moderately from Friday's mid-point of 7.6003.
Last week, the central bank used the mid-point to engineer a fall of the yuan to a six-week low against the dollar, the fastest five-day drop since the Chinese currency was revalued in July 2005. The central bank apparently decided tut yuan appreciation on hold while it waited to see whether the global credit squeeze would hurt the world economy and Chinese exports, traders said.
Although Wall Street and other world stock markets began rebounding on Friday, it's too early to be sure that the squeeze is ending, so the central bank may remain cautious for days or weeks, they said.
Several dealers predicted the yuan would stay in a 7.5800-7.6000 range this week. For coming weeks, the currency may consolidate between its post-revaluation high of 7.5543, hit on July 25, and Friday's six-week low of 7.6099. The dealers said they had not changed their forecasts for the yuan to rise around 5 percent for all of 2007, compared with 3.4 percent last year.
One-year dollar/yuan non-deliverable forwards, which on Thursday posted their biggest rise since the revaluation as the market cut its implied forecast for long-term yuan appreciation, fell back sharply on Monday in response to the stronger spot yuan.
The forwards were at 7.2040/90 in late trade on Monday against 7.2400/2500 late on Friday - their biggest daily drop since May 2006. Their new level implied yuan appreciation from the mid-point of between 5.39 and 5.46 percent in a year's time, up from Friday's 4.83-4.98 percent but down from 6.18-6.24 percent implied last Tuesday.