SHANGHAI, Aug 27: The central bank set the official yuan midpoint weaker on Monday morning in response to a strengthening of the dollar in overnight trade, and spot prices also weakened although traders said volumes remained light.
‘It’s quiet today,’ said a trader at a joint-stock bank in Shanghai.
‘Volumes are relatively light, and while prices weakened a bit due to the dollar index move overnight, there’s no discernable trend in trade.’
The People’s Bank of China (PBOC) set the official yuan midpoint—from which spot prices are allowed to diverge by 1 percent in either direction—at 6.3392 at market open.
Spot yuan opened slightly softer as well, then went on to trade within a tight range by midday, moving between 6.3592 and 6.3570 per dollar.
Traders expect the spot yuan to move between 6.35 and 6.37 against the dollar in the near term, while derivatives, including swaps and forwards, imply that the market expects the yuan to fall around 2 percent in the next 12 months.
The major forces pushing down the yuan’s value are external, driven by events in Europe, traders said, but the domestic economy has so far shown little sign that it can offset the downturn in exports.
China’s industrial profits fell 2.7 percent in the first seven months of 2012 from a year ago to 2.7 trillion yuan ($425 billion), the National Bureau of Statistics said on Monday, marking an acceleration of the profit drop of 2.2 percent in the first half of this year.
Much of this drop is due to a collapse in demand from Europe, which ordinarily accounts for one-fifth of Chinese exports. Chinese government data last month showed July exports rose just 1 percent from a year earlier and that new loans were at a 10-month low.
This demand weakness is exacerbated by the fact that the yuan continues to trade near decade-year highs against the euro.
In response, Premier Wen Jiabao said this weekend that China will implement new measures aimed at stabilising export growth in the third quarter, including speeding up tax rebates and widening the range of export insurance.
INCREASING STABILITY
The yuan had slid all year as market observers said Chinese corporates unwound short-dollar positions that became untenable as the dollar rocketed upward against the euro, and began to hold onto dollars earned in trade, and is now down 0.95 percent.
But the trend looks to have stabilised as corporates returned to selling foreign currencies and buying yuan again. China’s forex regulator reported on Friday that Chinese banks returned as net buyers of foreign currencies in over-the-counter transactions in July, purchasing $500 million and reversing from June’s net sale of $3.5 billion.
Offshore, the 250-day moving average of one-year dollar/yuan forward implied volatilities hit a more than four-year low of 3.2588 percent on Friday, but bounced back to change hands at 3.4500 percent at midday Monday.
Lower volatilities imply a higher degree of market consensus about the future value of a currency.
The 1-year non-deliverable forward yuan contracts continued to widened its spread against spot prices as it has since mid-July, changing hands at 6.4473. Onshore forwards traded at 6.4761.
Varying interest rates between markets in Hong Kong and the mainland help explain discrepencies in rates, analysts say.
(agencies)
Follow our WhatsApp channel