The yuan closed slightly lower against the dollar on Thursday as China's central bank left its daily midpoint nearly unchanged, partially offsetting fresh strength in the US currency. But the People's Bank of China (PBOC) appears to be determined to keep the yuan largely stable amid global economic and market woes, traders said.
The PBOC's strategy is no surprise to market players because 70 percent or more of China's foreign trade is settled in US dollars, so a strengthening dollar will do little harm to China's economy and trade, traders said.
Even if the dollar strengthens and the index reaches 85, the PBOC "is still likely to peg the yuan to the dollar to a great extent," said a trader at a Chinese commercial bank in Shenzhen.
"A rough yuan/dollar peg will do China little harm, while a sharply depreciating yuan will spark outcries from the United States and other partners as well as worries over the health of the China's economy, which is already slowing sharply," the trader said.
Spot yuan closed at 6.3733 per dollar, down slightly from Wednesday's close of 6.3686. Recently, the currency has persistently traded below the PBOC's midpoint, which is the base rate from which the PBOC allows the yuan to rise or fall 1 percent in a single day.
Before trade began, the PBOC set the yuan's midpoint at 6.3215, marginally weaker than Wednesday's fix of 6.3209. It has recently set a slew of midpoints stronger than the yuan's trading level, seeking to keep the exchange rate largely steady.
Offshore one-year non-deliverable yuan forward contracts changed hands at 6.4200 on Thursday afternoon to imply yuan depreciation of 0.73 percent against the dollar in the next 12 months based on the spot yuan's closing rate.