China's yuan surged against the dollar on Wednesday, breaking the 6.9600 mark for the first time since its revaluation, after the central bank set a much stronger daily reference rate to reflect the US currency's weakness in global markets.
But market sentiment remained cautious, with most traders taken aback by the sharply higher mid-point of 6.9597, up from the previous day's 6.9780, and refraining from pushing up the yuan aggressively.
"The fixing today took the market by surprise," said a trader with a US bank. "It takes time to digest such a big single-day jump, which could easily swing back the other way." The spot yuan rate closed at 6.9597 to the dollar, up sharply from Tuesday's close of 6.9735 although it retreated from the intraday high in late trade of 6.9566, its highest since the currency's revaluation in July 2005.
In the offshore non-deliverable forwards (NDFs) market, the Chinese currency rebounded strongly as many offshore dealers overcame initial hesitation and took bullish positions, encouraged by the strong spot yuan reference rate. One-year NDFs were bid at 6.5040 in late trade, compared with 6.5675 late on Monday, implying yuan appreciation of 7.01 percent in 12 months from Wednesday's spot mid-point, up sharply from 6.25 percent implied on Tuesday. The Chinese currency finished at 10.9533 to the euro on Wednesday, down from Tuesday's close of 10.8716.