The yuan closed unchanged against the dollar on Thursday after the People's Bank of China set a weaker midpoint for the second straight day, suggesting it may favour a pullback in coming sessions after recent fixings at record highs. Traders believe the yuan will remain largely stable in coming weeks, though the PBOC is expected to let the currency move in a wider range around the midpoint.
The midpoint fixing is the base rate used by the central bank to flag the government's intentions for the yuan's value, and from which the yuan is allowed rise or fall 0.5 percent in either direction in the course of a day. In the first half of March, the PBOC let the yuan's mid-point fixing weaken 0.70 percent against the dollar, its biggest 11-session loss since the China Foreign Exchange Trade System, the domestic market, was set up in 1994.
Spot yuan closed at 6.3060 versus the dollar, unchanged from Wednesday's close after the PBOC set its mid-point at 6.2932, weaker than Wednesday's 6.2912. But over the following eight sessions up to Tuesday, the yuan's mid-point value rose 0.82 percent, the biggest eight-session gain since October 2010. The PBOC set its midpoint at a record high for three sessions from Friday to Tuesday.
The yuan fell 0.58 percent in the first half of March and rose only 0.36 percent in the next eight sessions. It has not re-approached its record trading high of 6.2884 set on February 10. In the offshore non-deliverable forwards (NDF) market, the benchmark one-year NDFs implied a yuan depreciation of 0.66 percent in afternoon trade, narrowing slightly from the 0.71 percent fall implied at Wednesday's close.
"This year's quota appears to have expanded from last year, but the total amount remains tiny for such a large economy, and is unlikely to have any impact on yuan trading," said a dealer at a European bank in Shanghai. As the Chinese economy shows signs of slowing, Beijing is trying to encourage long-term capital inflows to sustain investment.
Faced with an uncertain global environment which is sapping demand for Asia's exports, traders said Beijing is likely to take a more defensive stance in its exchange rate policy and not let the yuan stage another big rise like last year's 4.7 percent appreciation. Still, traders believe the government will allow the yuan to appreciate about 0.7 percent against the dollar in the first half of this year, guiding it to move in a relatively wide range of 6.25 to 6.35.