The yuan edged lower against the dollar in the spot and offshore non-deliverable forwards markets on Wednesday, after China's central bank set a lower reference rate despite the US currency's weakness on global markets.
The central bank appeared to be sticking to a yuan appreciation pattern of several steps forward, one step backward, but it must also watch global markets and may adjust its near-term tactics if global dollar weakness persists, dealers said.
"The central bank surprised the market by setting weaker mid-points over the past two days," said a dealer at a US bank in Shanghai. "But we don't believe it can keep going its own way if global dollar weakness lingers."
Before trade began, the central bank set the yuan's daily mid-point at 6.8621 versus the dollar, down from Tuesday's 6.8608. It had set post-revaluation high reference rates for three days in a row through Monday. The lower mid-point helped to confine the spot yuan rate to a narrow, weaker range of 6.8580 to 6.8593 to the dollar throughout Wednesday morning, down from Tuesday's close of 6.8561.
Offshore, one-year dollar/yuan NDFs had risen to 6.4730 at midday from Tuesday's close of 6.4600. The latest level implied yuan appreciation of 6.01 percent against the dollar in the next 12 months from Wednesday's spot mid-point, down from 6.20 percent implied at Tuesday's close and threatening to fall below the range of 6 to 7 percent that many dealers believed had become the established market consensus.
"The offshore market is apparently jittery about a possible sudden slowdown in yuan appreciation similar to the one seen in April, which caused heavy losses for many speculators," said a dealer at a European bank in Shanghai.