Yuan closes at record high; all eyes on China FX policy
SHANGHAI: China's yuan ended at a record high versus the dollar on Monday after it traded above the central bank's mid-point and traders said the currency appeared poised for slow but steady appreciation this year.
The People's Bank of China set its mid-point slightly higher, matching the fixing's recent record high, a first signal the yuan's fortunes could be decoupled from political events, traders said.
The stronger-than-expected mid-point after the end of Chinese President Hu Jintao's visit to the United States last week was a surprise as the PBOC had previously let the Chinese currency fall right after major political events, traders said.
"As its economy has apparently walked out of the global financial crisis, China now has a bigger leeway to let the yuan appreciate," said a senior trader at a Chinese commercial bank.
"While the pace will still be controlled, a steady yuan appreciation of more than 5 percent in 2011 is almost certain."
China has so far played a game of hide-and-seek with its critics who say the government has kept the yuan artificially low to protect its exports, thus robbing jobs in other countries.
It typically lets the yuan rise ahead of major political events to deflect pressure but will pull it back to some extent afterwards. Accumulatively, the yuan has risen nearly 26 percent since and including its landmark revaluation in July 2005.
The PBOC has used its mid-point to signal policy intention and its aim to balance external pressures for a stronger yuan against domestic pressures to keep the currency stable.
PBOC SIGNAL Last week, the government posted a final set of 2010 economic data, with the latest figures showing its growth soaring pa! st expec tations while inflation remained at a high level.
China's economic strength will help ease domestic resistance to yuan appreciation. At the same time, a stronger currency can be part of the PBOC's toolkit in its anti-inflation campaign, though officials have downplayed the role of the exchange rate.
"Factors supporting the yuan's appreciation remain even if they have not strengthened," said a dealer at a European bank.
"As long as the government is eager to balance its economy and fight imported inflation, the trend for the yuan to appreciate will not possibly reverse."
On Monday, the PBOC fixed the yuan's mid-point versus the dollar at 6.5883, firmer than Friday's 6.5886 and matching the fixing's record high last Thursday.
Spot yuan closed at 6.5813, up from 6.5833 at Friday's close after trading above the PBOC fixing all the day, touching an intraday low of 6.5871 -- a clear indication of the market's confidence in near-term yuan appreciation.
It rose as high as 6.5808 on Monday, its highest intraday level since China let the yuan publicly trade in 1994.
The currency has now risen 3.73 percent against the dollar since its mid-June depegging. It can rise or fall 0.5 percent from the PBOC's fixing in a given day.
Despite optimism in the domestic market, dollar/yuan offshore forwards have staged a lacklustre performance in recent weeks, partly because signs of a U.S. economic recovery pushed hedged funds to reallocate their assets, traders said.
"If you watch the recent performance of Asian currencies, you will see most of them showing signs of capital outflow, presumably to U.S. assets," said a U.S. bank trader. "So stable dollar/yuan forwards imply that offshore investors are ! still mo re bullish about the yuan than other Asian currencies."
Benchmark one-year dollar/yuan non-deliverable forwards were bid at 6.4600 late on Monday, up from 6.4500 at Friday's close, with their implied yuan appreciation in a year's time falling to 1.99 percent from 2.15 percent.
The People's Bank of China set its mid-point slightly higher, matching the fixing's recent record high, a first signal the yuan's fortunes could be decoupled from political events, traders said.
The stronger-than-expected mid-point after the end of Chinese President Hu Jintao's visit to the United States last week was a surprise as the PBOC had previously let the Chinese currency fall right after major political events, traders said.
"As its economy has apparently walked out of the global financial crisis, China now has a bigger leeway to let the yuan appreciate," said a senior trader at a Chinese commercial bank.
"While the pace will still be controlled, a steady yuan appreciation of more than 5 percent in 2011 is almost certain."
China has so far played a game of hide-and-seek with its critics who say the government has kept the yuan artificially low to protect its exports, thus robbing jobs in other countries.
It typically lets the yuan rise ahead of major political events to deflect pressure but will pull it back to some extent afterwards. Accumulatively, the yuan has risen nearly 26 percent since and including its landmark revaluation in July 2005.
The PBOC has used its mid-point to signal policy intention and its aim to balance external pressures for a stronger yuan against domestic pressures to keep the currency stable.
PBOC SIGNAL Last week, the government posted a final set of 2010 economic data, with the latest figures showing its growth soaring pa! st expec tations while inflation remained at a high level.
China's economic strength will help ease domestic resistance to yuan appreciation. At the same time, a stronger currency can be part of the PBOC's toolkit in its anti-inflation campaign, though officials have downplayed the role of the exchange rate.
"Factors supporting the yuan's appreciation remain even if they have not strengthened," said a dealer at a European bank.
"As long as the government is eager to balance its economy and fight imported inflation, the trend for the yuan to appreciate will not possibly reverse."
On Monday, the PBOC fixed the yuan's mid-point versus the dollar at 6.5883, firmer than Friday's 6.5886 and matching the fixing's record high last Thursday.
Spot yuan closed at 6.5813, up from 6.5833 at Friday's close after trading above the PBOC fixing all the day, touching an intraday low of 6.5871 -- a clear indication of the market's confidence in near-term yuan appreciation.
It rose as high as 6.5808 on Monday, its highest intraday level since China let the yuan publicly trade in 1994.
The currency has now risen 3.73 percent against the dollar since its mid-June depegging. It can rise or fall 0.5 percent from the PBOC's fixing in a given day.
Despite optimism in the domestic market, dollar/yuan offshore forwards have staged a lacklustre performance in recent weeks, partly because signs of a U.S. economic recovery pushed hedged funds to reallocate their assets, traders said.
"If you watch the recent performance of Asian currencies, you will see most of them showing signs of capital outflow, presumably to U.S. assets," said a U.S. bank trader. "So stable dollar/yuan forwards imply that offshore investors are ! still mo re bullish about the yuan than other Asian currencies."
Benchmark one-year dollar/yuan non-deliverable forwards were bid at 6.4600 late on Monday, up from 6.4500 at Friday's close, with their implied yuan appreciation in a year's time falling to 1.99 percent from 2.15 percent.
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