SHANGHAI, Apr 26: China’s yuan stepped up on Friday to another record high, as the central bank set its midpoint sharply higher as part an apparent effort to guide the spot rate closer to equilibrium level in advance of a possible widening of the daily trading band.
Traders say authorities appear to be aiming at narrowing the gap between the central bank midpoint and the spot rate in order to avoid a sudden one-off appreciation of the spot rate once the band is widened.
The People’s Bank of China (PBOC) allows the spot exchange rate to rise or fall by no more than 1 percent from the daily midpoint the PBOC sets each morning.
The PBOC is likely to delay any widening in the band until it is farily confident that the move will not lead to an abrupt movement of the spot rate. But most analysts and traders believe the move will occur sometime in the first half of this year.
The spot rate has traded near the very top of the band since the fourth quarter of last year, with the midpoint is acting as a restraint on market forces pushing for stronger appreciation.
Leading up to Friday, the PBOC had set a series of aggressively stronger midpoints this month, but the gap between the spot rate and the fixing had not narrowed substantially.
‘(The central bank) keeps chasing the spot rate, but they can’t catch up to it,’ said a forex trader at a city commercial bank in Shanghai.
A convergence between spot and fixing would boost confidence that the strengthening of the spot rate this month had successfully released at least some of the pent-up appreciation pressure that weaker midpoints earlier in the year had held in check.
Progress on that score finally appeared on Friday. Spot yuan changed hands at 6.1640 per dollar at midday, 56 pips weaker than the top-end limit of 6.1586 based on Friday’s midpoint.
That compared to a distance of only 30 pips between Thursday’s closing level of 6.1707 and the same day’s top-end limit of 6.1677. The gap at Wednesday’s close was 21 pips.
But it’s unclear if even this modest convergence is sustainable. The yuan touched an intraday high of 6.1616 in early trade on Friday, a gap of 30 pips.
SPECULATION
China’s trade surplus has continued to drive yuan appreciation this year, as it has for much of the last decade.
Beyond this surplus, however, traders say speculation by China-based corporates is responsible for why yuan demand has consistently outweighed dollar demand in China’s interbank market.
Balance of payments data released on Thursday showed China posted a capital and financial account surplus of of $101.8 billion in the first quarter this year, a massive increase from the $20.0 billion surplus in the fourth quarter last year.
‘A lot of the yuan buying is speculative behavior,’ said the Shanghai-based trader, who said corporates are ‘overhedging’ their exposure to the USD by buying yuan in forwards.
One-year onshore swap points have fallen sharply from 1,172 points on March 4 to 885 points at midday on Friday, which is consistent with heavy demand for forward yuan.
Traders also say that relatively strong export figures in March reflected inflated export invoices used to disguise speculative inflows.
Hot money inflows may have totaled around $183 billion in the first three months of this year, according to a Reuters estimate that excludes speculative inflows via deceptive trade invoicing.
(AGENCIES)
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