China's yuan closed a touch higher against the dollar on Tuesday but held to a range much lower than the Chinese central bank's daily mid-point, as dealers said an overnight announcement of another monetary easing put downward pressure on the currency.
After the market closed on Monday, the central bank announced a cut in banks' benchmark one-year lending and deposit rates by 0.27 percentage point, the fifth reduction since mid-September, to fight against an economic slowdown sparked by the global financial crisis.
"The narrowing spread between Chinese and US dollar interest rates will exert some depreciation pressure on the yuan against the dollar, although the central bank apparently tried to soothe the market with a stable mid-point today," said a dealer at a major European bank in Shanghai.
Before trade began on Tuesday, the central bank set the yuan's mid-point to the dollar at 6.8389, marginally lower than Monday's reference rate of 6.8377, in another sign that it hoped to keep the Chinese currency stable for now. Spot yuan closed at 6.8485, compared with Monday's close of 6.8510, but it moved in a range of 6.8481 to 6.8583 for the day, much lower than the mid-point.
Dealers said another source of pressure on the yuan was an increasing reluctance by corporate clients to settle their dollar income into yuan after a sharp strengthening in the US currency since mid-July of this year. "The (domestic) market has seen decreasing dollar sales," said a dealer at a US bank in Shanghai. "And traditional year-end dollar demand from corporate clients to wind up their books for the year is adding to the short supply."
Several dealers said they believed the yuan had the potential to fall slightly to 6.80 or 6.90 against the dollar by the end of this year or early next year. The Chinese central bank has used its mid-point system and indirect intervention to keep the yuan stable over most of the past five months amid apparent worries over possible capital outflows as Chinese asset prices fall.
Among the signs of possible outflows, China's foreign exchange reserves, the world's largest, shrank in October to less than $1.89 trillion, their first monthly fall since December 2003, a source familiar with the situation told Reuters on Monday. Offshore, one-year dollar/yuan non-deliverable forwards fell slightly to 7.0908 bid late on Tuesday from 7.0933 in late trade on Monday. Their latest level implied yuan depreciation over the next 12 months from the day's spot mid-point of 3.55 percent, down marginally from 3.60 percent implied on Monday.