The yuan fell as much as 0.4 percent against the dollar in intraday trading on Monday in key one-year offshore forwards, its biggest single-day fall in the NDFs since mid-November, after tough talk by a top Chinese trade official on China's stable yuan policy.
Dollar/yuan non-deliverable forwards rose across the curve, propelled as well by a dollar rise on global markets, with one-year NDFs bid as high as 6.6865 in the afternoon, pushing implied 12-month yuan appreciation down to 2.09 percent measured from the Chinese central bank's daily mid-point.
One-year NDFs eased back again late in the session to 6.6790 bid, implying yuan appreciation of 2.21 percent compared with 2.50 percent at Friday's close. Three-month NDFs advanced to 6.8180 bid from Friday's 6.7855 and two-year NDFs rose to 6.4330 bid from 6.3970, also trimming implied future yuan appreciation. "The dollar's rise and China's strong wording on keeping the yuan stable led some banks and hedge funds to trim their expectations of yuan appreciation," said a US bank dealer in Shanghai.
"But economic realities in China and the United States are such that China will eventually allow the yuan to appreciate in the long run. That prospect will limit the potential for the benchmark one-year NDFs to rise." For this week, the yuan is likely to find strong support at the psychologically important 6.70 mark against the dollar in one-year NDFs, the US bank dealer and several others said.
"Bets in either direction involve lots of risk right now," said a dealer at a European bank in Shanghai. "With the stakes too high for the rewards, both hedgers and speculators are expected to refrain from trading too much for the time being." Chinese Commerce Minister Chen Deming said on Sunday that Beijing would retaliate if the United States declares China a currency manipulator and imposes trade sanctions, firing the latest salvo in a spat over the value of the yuan.
Chen again accused Washington of politicising the issue ahead of an April 15 deadline for the US Treasury to rule whether China is unfairly holding down its exchange rate to gain a competitive edge in global markets. Political pressure is growing in Washington to declare China a currency manipulator, with some US senators threatening to slap duties on Chinese products if Beijing does not allow the yuan, also known as the renminbi, to rise.
Globally, the US dollar had risen around 1.5 percent against a basket of six major world currencies by early European trade on Monday from last Wednesday's close. Spot yuan closed at 6.8266 per dollar on Monday, little changed from Friday's close of 6.8265 after the Chinese central bank fixed the yuan's daily mid-point, or reference rate, at 6.8264 per dollar on Monday, little changed from the previous session's 6.8263.