China's yuan rose against the dollar on Friday bolstered by expectations of an imminent easing in monetary policy as the Chinese government steps up efforts to boost its economy. Spot yuan closed at 6.8242 to the dollar, up from its previous close of 6.8300, after moving in a narrow range of 6.8238 and 6.8313.
The lower-than-expected yield in the central bank's three-month bill auction on Thursday had fuelled expectations for an interest rate cut as early as this week. A cut in interest rates usually hurts the yuan as it encourages investors to shift to higher-yielding currencies, but amid slowing economic growth, markets are now more focused on China's fundamentals, and traders said policies that help spur growth will lend support to the currency.
Traders also believe the central bank's control over the spot foreign exchange market through its mid-point system, as well as indirect intervention when needed, mean it can easily prevent interest rate cuts from weakening the yuan if it wishes.
"In fact, reaction to the much-anticipated rate cut is not very strong today as that has already been digested by the market yesterday," said a trader with a major Chinese bank. China has reduced its benchmark interest rates three times and cut banks' required reserves twice since mid-September amid an unfolding global financial crisis and a slowdown in its economy.
Further rate cuts will also take the pressure off the authorities to lower the value of the yuan to support exports and growth, traders said. Before trade began, the central bank set the currency's daily mid-point against the dollar at 6.8289, nearly unchanged from Thursday's 6.8295.
Dealers said they did not expect major movements in the yuan in coming months as the government continues to ensure market stability via the mid-point system or direct intervention. As such, an extended depreciation in the yuan as many expect, may not happen next year, they said. Yi Gang, deputy central bank governor, told a news conference on Friday that China's capital inflows and outflows were broadly in balance, suggesting Beijing may be happy keeping the yuan at its current level.
One-year dollar/yuan non-deliverable forwards edged higher to 6.9250 in late trade from 6.9000 at Thursday's close, implying yuan depreciation of about 1.39 percent over the next 12 months from the day's spot mid-point, against 1.03 percent implied on Thursday. Offshore one-year dollar/yuan volatilities was at 10.80 percent bid by late trade, down from 11.3 percent bid from Thursday's close.