The yuan rose to a fresh one-month high against the dollar on Friday after the Chinese central bank fixed the mid-point of the yuan at a five-month high, outside the range it has maintained since mid-December. The People's Bank of China appears to be testing the waters for minor yuan appreciation as China's economy shows signs of recovery, while other Asian currencies such as the South Korean won, approached their highest levels this year.
The yuan is also benefiting from a weaker dollar in global markets as the US Dollar Index fell 1 percent overnight. "It appears that the (Chinese) central bank is conducting an adjustment of its yuan tactics for the first time this year," said a dealer at a US bank in Shanghai. "If there are no major changes in market and economic fundamentals in China and Asia, the yuan may have the potential to rise around 100 pips in coming weeks."
The Korean won pared some of its gains against the dollar after data on Friday showed Asia's fourth-largest economy averted recession in the first quarter and on better-than-expected corporate earnings. Several dealers, however, were quick to add that the Chinese government would not immediately change its strategy of a stable yuan and possibly not until late this year as major global economies have yet to emerge from recession.
Reflecting cautious sentiment, one-year NDFs only fell slightly to 6.7575 bid late on Friday from Thursday's close of 6.7730. The NDFs' latest level implied yuan appreciation of 1.03 percent over the next 12 months from the day's spot mid-point, compared with 0.83 percent implied at Thursday's close.
Spot yuan climbed to an intraday high of 6.8265 against the dollar on Friday, hitting its highest level since March 20 for the second straight day. It fell back slightly to close at 6.8273 on Friday, still up from Thursday's close of 6.8299. Before trade began, the central bank set the yuan's daily mid-point at 6.8273, its highest level since November 26 and up from Thursday's reference rate of 6.8295.
It was the first time the central bank set the mid-point far from the firmer end of the 6.8300 to 6.8399 range it had maintained over the past four months. Previously, it had allowed the mid-point to stray outside the firmer end by only a few pips a few times.
China on Friday issued its 2008 international balance report, which showed it still had decent surpluses last year despite its slowing economy, supporting the yuan's value in the long term. Its current account surplus rose to $426.1 billion in 2008 from $371.8 billion in 2007, the State Administration of Foreign Exchange (SAFE) said.
The surplus is equivalent to about 9.7 percent of 2008 gross domestic product at current exchange rates. The surplus on its capital and financial account shrank to $18.9 billion from $73.5 billion in 2007. After errors and omissions, the overall balance of payments surplus fell to $418.9 billion in 2008 from $462 billion in 2007.