The People's Bank of China forced the yuan to end lower against the dollar on Thursday, but trading remained deadlocked at the day's limit-up level as the market baulked at doing transactions at the rates decided by the central bank, traders said. The yuan opened at its limit-up level of 6.2282 and, after only briefly drifting away, ended the day there, a slight weakening from Wednesday's close of 6.2253.
The weakening was ensured when the PBOC, before trading began, set the yuan's daily midpoint at 6.2911 versus the dollar, its weakest fix since November 22 and much softer than Wednesday's fix of 6.2871. The PBOC permits the exchange rate to rise or fall by no more than 1 percent from the base rate it sets each morning. For many days, the yuan has been opening at the upper-end of its permitted band, which reflects how traders want the currency to strengthen more than the PBOC is letting it.
"Our clients refuse to trade yuan/dollar at the PBOC's decided rates," said a dealer at a US bank in Shanghai. "Instead, they hope to trade at the CNH (offshore) levels." CNH, the name for yuan traded in Hong Kong, where the PBOC cannot control the rate, was stronger than in Shanghai. In late trade, it was trading at 6.2110 against the dollar, after moving in a range of 6.2100 to 6.2150. So, the Shanghai market wants a premium of 172 pips for spot yuan by late Thursday.
In Shanghai, trading was sluggish again on Thursday, with volume falling to a recent low of $2.94 billion from $10.34 billion on Wednesday. The market's average full-day volume was $13.9 billion in the first nine months of this year. Traders expect the low trading volumes in the onshore market to prevail until the end of this year or early 2013, with the PBOC leaving it to the market to whittle down an overhang of dollars. The overhang stems from long dollar positions built up in the first half of the year, when the yuan was weakening. Traders say the market is hoping that the central bank gives way by either adjusting the daily trading range to let the yuan strengthen, or by buying large amounts of dollars.