UNDATED, Feb 10: The Chinese yuan strengthened marginally today, even as data released this morning showed inflation in January hitting a five year low heightening expectations that the authorities will further stimulus measures to counter a slowdown in the economy. The weak inflation readings has raised expectations that the People’s Bank of China might guide the yuan lower to help boost exports and shore up prices and growth. Market action appeared to show the People’s Bank of China was more concerned with maintaining confidence in a stable yuan, though there was speculation that the central may want to guide the yuan lower in order to boost exports. The PBOC set the midpoint rate at 6.1295 per dollar prior to market open, firmer than the previous fix of 6.1311. Following today’s data release, China’s statistics agency stated that weak inflation was mainly a product of falling global commodity prices.
If falling oil and metal prices, rather than lackluster domestic demand, are largely to blame for weak inflation then China’s central bank may be less inclined to let the yuan fall. The spot yuan opened at 6.2475 per dollar and was changing hands at 6.2448 by midday, 24 pips stronger than the previous close and 1.88 percent weaker than the midpoint. The spot rate is currently allowed to trade with a range 2 percent above or below the official fixing on any given day. The offshore yuan was trading at 6.2452 per dollar. Offshore one-year non-deliverable forwards contracts (NDFs), considered the best available proxy for forward-looking market expectations of the yuan’s value, traded at 6.3675, making the yuan 3.74 percent weaker than the midpoint. One-year NDFs are settled against the midpoint, not the spot rate, and now that the trading band has been widened to 2 percent in either direction, corporates are much warier of using the NDF to hedge given the basis risk inherent in them. As a result the market has lost liquidity in recent years and has frequently proven an unreliable measure of market sentiment. (AGENCIES)
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