SWHANGHAI, May 4: The yuan opened slightly lower against the dollar on Friday from its previous close as the central bank set a weaker trading midpoint for the second consecutive day after three days of record-setting highs against the dollar.
Spot yuan opened at 6.3065 per dollar, 15 points weaker than Thursday’s close and 0.55 percent away from the midpoint, set at 6.2721.
The yuan has continued to trade within a tight band against the dollar since mid-March, and the daily weighted moving average flattened in mid-April, remaining in a range between 6.3069 and 6.3063 ever since.
Chinese authorities say that the yuan is at ‘a reasonable equilibrium,’ according to an article published in the People’s Daily on Friday.
It argued that comparisons of factors including labour costs and productivity, raw materials and undescribed ‘environmental’ costs suggest the yuan could actually be slightly overvalued.
The article could sow further tension between Chinese and U.S. Officials currently in Beijing for the Strategic and Economic Dialogue (S&ED).
It was published one day after U.S. Treasury Secretary Timothy Geithner, in China with Secretary of State Hillary Clinton for the forum, repeated calls for China to have a stronger yuan to create room for more flexible policy.
Traders who spoke to Reuters tended to agree that the current range – despite aggressive midpoint fixings by the central bank – expresses genuine market sentiment.
However, one trader argued that it is difficult to assess the true state of demand for the yuan. The market is dominated by four state-owned banks, limiting the ability of smaller players to influence pricing, he said.
The spot yuan is up 7.6 percent since it was officially depegged from the dollar and allowed to float within a range set by the central bank in June 2010.
Regulators widened the trading band on April 16 to 1 percent up from 0.5 percent, but the yuan did not show any reaction in terms of increased volatility, remaining within 0.2 percent of the fixing.
The yuan was effectively dragged into its new trading range when the central bank began aggressively moving the midpoint away from the daily moving average on April 25. The yuan traded briefly outside the old 0.5 percent range for the first time on April 27 and has traded outside the old band all week.
Traders said the strong midpoints were political gestures aimed at the U.S. In the runup to the S&ED and are unlikely to be sustained.
‘I think the fixing will come down significantly in the said term,’ said a trader at a joint stock bank in Shanghai.
But he added that at current levels, the upside and downside for traders is unbalanced.
Because the yuan’s trading band is symmetrical to the fixing, a spot price that remains significantly weaker than the midpoint can support long intra-day strategies.
‘In terms of risk-reward, with such a high band, there’s only around 200 pips downside to the weak side of the range, but there’s a 400 to 600 pip upside.’ (AGENCIES)
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