Yuan closes little changed as long holiday approaches

Thu Feb 7, 2013 9:13am GMT

(Updates to close)
    By Pete Sweeney
    SHANGHAI, Feb 7 (Reuters) - The yuan closed little changed
versus the dollar on Thursday in moderate volume after the
central bank guided the currency weaker as the official Spring
Festival holiday approaches.
    The midpoint inversely tracked the dollar index,
which rose in overnight trade as investors awaited central bank
policy meetings in Europe and Britain. 
    Traders said that in recent weeks the People's Bank of China
(PBOC) had started to pay more attention to the condition of
Asian currency markets when setting the midpoint, in particular
the sliding Japanese yen. 
    The days before the beginning of the Spring Festival holiday
in mainland China - which will see markets close for a week
starting Feb. 11 - are usually characterised by unusual behavior
in money markets as corporates stock up on cash and settle
aggressive positions.   
    Market volumes were muted, posting a below-average $9
billion in transactions, singificantly lower than the preceding
four trading days, when volumes hovered around $20 billion per
day.

The onshore spot yuan market at a glance: 
 Item               Current   Previous  Change (pct)
 PBOC midpoint        6.2898    6.2881         -0.03
                                        
 Spot yuan            6.2322    6.2317         -0.01
                                        
 Divergence from       -0.92                        
 midpoint* (pct)                        
 Spot change ytd       -0.03                        
 (pct)                                  
 Spot change since 2005 revaluation           +32.80
 
*Divergence of the dollar/yuan exchange rate. Negative number
indicates that spot yuan is trading stronger than the midpoint.
The People's Bank of China (PBOC) allows the exchange rate to
rise or fall 1 percent from official midpoint rate it sets each
morning.

    OFFSHORE CNH MARKET   
    The offshore yuan traded in Hong Kong (CNH)          remains
at a premium to the onshore version. Analysts say this is partly
due to the fact that the offshore yuan is not bound by the
official midpoint, which keeps the exchange rate within 1
percent on either side of the fix. 
    This allows investors in Hong Kong to express more optimism
or pessimism about the future direction of the yuan, although
traders say that if spreads get too wide, corporates quickly
move to arbitrage them away. 
     The offshore yuan market got a boost on Wednesday when
Emirates NBD          , Dubai's largest bank, started offering
yuan accounts, joining a handful of other banks, including HSBC
         and UAE-based Mashreq          , in offering yuan
accounts in Dubai, the main hub for China's trade with oil-rich
countries in the Gulf.                
    One-year non-deliverable forwards, considered an imperfect
indicator of future expectations for yuan appreciation or
depreciation, were quoted at rates implying depreciation over
the next twelve months.
    
The offshore yuan market at a glance:    
 Instrument                Current     Difference from
                                       onshore (pct) 
 Offshore spot yuan        6.2220      +0.16*
                                       
 Offshore non-deliverable  6.3185      -0.47**
 forwards                              
 
*Premium for offshore spot over onshore 
**Figure reflects difference from PBOC's official midpoint,
since non-deliverable forwards are settled against the midpoint.
. 
    
    >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>
    
    MARKET DRIVERS
    - China restrains yuan rise in response to Asian currency 
weakness 
    - Corporates get tough lesson in FX risk from central bank
 
    - Forces underpinning yuan rally to lose steam in 2013
   
    - Spot yuan has rallied strongly since late July 2012, and
the PBOC is using its daily midpoint to restrain further
appreciation. GRAPHIC: link.reuters.com/pyx74t
    - China's trade surplus surged in late 2012, but the surge
was mainly due to weak imports rather than strong exports.
GRAPHIC: link.reuters.com/qav68s
    - Corporate yuan purchases still exceed dollar purchases,
but the gap is narrowing. Exporters are converting progressively
smaller portions of their foreign exchange receipts into yuan.
GRAPHIC: link.reuters.com/syx74t 
    - Hot money outflows may be putting downward pressure on the
yuan. GRAPHIC: link.reuters.com/saz74t
    - Despite relatively stable dollar/yuan exchange rate, the
yuan is appreciating on a trade-weighted basis. GRAPHIC: link.reuters.com/sed74t
    
   >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>   

 (Editing by Kim Coghill)
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