China's yuan weakened slightly against the dollar in thin trading on Monday, and traders said they expect the market to remain steady before foreign currency demand surges next week ahead of the long Lunar New Year holiday.
"Short selling of the yuan has almost disappeared so trading was relatively thin," a dealer at a foreign bank in Shanghai said. "Still I see the currency broadly steady, at least for this week."
She added that increased foreign currency purchases by corporates and individuals might emerge next week for needs ahead of Lunar New Year, which falls on February 8. The market will be closed for one week.
The People's Bank of China set the midpoint rate at 6.5557 per dollar prior to market open on Monday, 0.02 percent firmer than the previous fix of 6.5572.
The spot market opened at 6.5791 per dollar and was changing hands at 6.5796 at midday, only 0.02 percent softer than the previous close.
On Monday, the offshore yuan was trading 0.40 percent weaker than the onshore spot at 6.6059 per dollar.
The onshore yuan strengthened 0.2 percent against the euro
to 7.1149. It also firmed 0.5 percent against the Japanese yen JPYCNY=CFXS, hovering at 5.5387 to 100 yen.
Chinese officials at the World Economic Forum in Switzerland last week said the government had no intention to push the currency down further to gain a competitive advantage.
Still, investors are far from convinced that the government wants to hold the yuan steady for long following an unexpected devaluation in August and perceived policy flip-flops, which fuelled financial market jitters that the economy was in worse shape than Beijing had let on.
International Monetary Fund Managing Director Christine Lagarde also called for more clarity on how Chinese authorities are managing their currency.
The trade-weighted yuan exchange rate index, issued every Friday by the China Foreign Exchange Trade System (CFETS), has appreciated 0.88 percent in 2016, making its latest reading 100.84. "We pay little attention to it actually, as it is more like an official figure for foreign countries to get a general picture of the Chinese currency," said a Shanghai dealer at an Asian bank.
The CFETS index could partly help to reflect the level of the Chinese currency in a comprehensive way, China Guangfa Bank wrote in a research note.
The note also said it is inappropriate to use 100, the index level at the end of 2014, as a medium or long-term benchmark for the Chinese currency, given changing developments in global markets.