China's yuan fell against the dollar on Wednesday after two days of strong gains, but traders said the medium-term outlook was still for faster appreciation. The yuan, which hit a new post-revaluation high of 7.3270 versus the US currency on Tuesday.
The third straight day of fresh highs, closed Wednesday at 7.3444, down from Tuesday's finish of 7.3297. The Chinese currency tumbled in the last 90 minutes of trade, partly because of a further rise of the dollar against the yen, and perhaps on the back of fresh dollar demand from foreign companies in China remitting year-end profits overseas.
The Chinese central bank encouraged Wednesday's pull-back by setting a daily mid-point of 7.3298, down from Tuesday's reference rate of 7.3261.
But dealers said this was just a temporary consolidation in an acclerated yuan uptrend, which could resume as soon as early next month. "Trading is back to normal today after the central bank set the mid-point at a weaker level in line with the firmness of the dollar globally," said a Shenzhen-based trader at a Chinese bank. But he added that he did not rule out big moves at the start of next year - conceivably including a further widening of the yuan's daily trading band - which would set the tone for faster yuan appreciation in 2008.
The Chinese currency's 0.54 percent rise over Monday and Tuesday was its biggest two-day rise since the yuan was revalued in July 2005. It was encouraged by strong mid-points set by the central bank. The mid-point's jump of 0.35 percent on Monday was the second biggest since the revaluation, while Monday's mid-point meant that day's trading band - 0.5 percent on either side of the reference rate - did not contain the previous day's close, an extremely rare event.
Dealers saw this as further confirmation that to fight inflation, the central bank was preparing to allow substantially faster yuan appreciation, while also encouraging intra-day trade to become more volatile and two-directional, which would make managing the accelerated appreciation easier.
The yuan's fall on Wednesday broke initial technical support around 7.3400, which was temporary intra-day resistance on Tuesday, but stronger technical support lies around 7.3600, where the yuan briefly peaked in mid-December.