The yuan rose against the dollar in the spot and offshore forwards markets on Friday in response to global dollar weakness and signs that China was becoming less willing to accept the dollars status as the worlds top trade and reserve currency.
One-month dollar/yuan non-deliverable forwards (NDFs) slipped as far as 6.8215 bid from Thursdays close of 6.8320, implying yuan appreciation over the next month from the days spot mid-point for the first time since last September. Previously, the NDFs had implied minor depreciation. Spot yuan rose only slightly to a 10-week high of 6.8264 before closing at 6.8277, up marginally from Thursdays finish of 6.8285.
But the yuan traded significantly above the mid-point for a second straight day, suggesting a shift in forex market sentiment. Previously, it had not traded above the mid-point on a sustained basis since early February. Before trade began on Friday, the Chinese central bank set the yuans mid-point, a reference rate which it uses to influence trade, at 6.8293, its strongest level since late November.
Several traders said they still did not expect the Chinese central bank to let the yuan break any time soon above the range of 6.81-6.88, which it has maintained since last July, when the global financial crisis began to worsen. The Chinese economy is still not showing clear signs of a recovery and exports plunged in February, when Chinas policy of keeping the yuan stable against the dollar caused the yuan to outperform other currencies greatly. The central bank may now be happy to see a period of yuan under-performance to help exports.
Nevertheless, traders said signs of an erosion of the dollars global status were contributing to the yuan markets shift in mood. In Moscow, a senior Russian government source said on Thursday that China and other emerging nations backed Russias call for a discussion on how to replace the dollar as the worlds primary reserve currency.
"They (China) did not formally put forward their position for the G20 summit but unofficially they had distributed their paper regarding the same ideas," the source said.
And in China, the official Shanghai Securities News reported on Friday that the foreign exchange regulator had drafted rules to let Chinese banks convert foreign currency holdings into other foreign currencies without regulatory approval. Chinas State Administration of Foreign Exchange is now gathering comment on the rules, the paper said. SAFE officials declined to comment.
Some dealers said the rules, if officially promulgated, might eventually lead to a reduction of dollar holdings at Chinese banks, given the current weakness of the US financial markets and economy. "Increasing signs that the dollar is losing at least part of its importance in the global financial system are making it much harder to predict the yuans value against the dollar in the medium term," said the US bank dealer.
One-year dollar/yuan NDFs hit a fresh four-month low of 6.8491, implying yuan depreciation against the dollar of just 0.29 percent over the next 12 months from the mid-point, against 0.70 percent implied at Thursdays close.