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Yuan at 5-month high on short covering and Bank of China dollar sales
September 26, 2012 / 9:47 AM / 5 years ago

Yuan at 5-month high on short covering and Bank of China dollar sales

* Yuan at strongest level since mid-April

* Widest-ever strong-side divergence from c.bank fix

* Banks want to avoid short yuan positions through holiday

* Bank of China selling dollars heavily in recent days (Updates to close)

By Gabriel Wildau

SHANGHAI, Sept 26 (Reuters) - The yuan closed at a five-month high on Wednesday, as traders clamored to cover short positions in advance of the long holiday, while Bank of China continued dumping dollars, according to traders.

Spot yuan closed at 6.3020 per dollar, 46 pips firmer than Tuesday's close.

At 0.7 percent, Wednesday's close also marked yuan's widest strong-side divergence from the fix since the central bank doubled the yuan's daily trading band from 0.5 percent to 1 percent in April. It was the third straight session in which spot yuan moved in the opposite direction of the midpoint.

Opinions differ about the effect of the Mid-Autumn Festival holiday, but most traders now say that dollar demand from corporate clients is elevated near month end, with the holiday further amplifying the effect.

In particular, oil companies require dollars in this period to pay for imported crude.

But the effect of this elevated dollar demand has been offset in recent days by heavy dollar selling by a single bank, Bank of China (BOC), which has stopped the yuan from weakening.

"Most banks have strong dollar demand, but because of BOC keeps dumping dollars, the rate can't climb higher," said a trader at a Chinese city commercial bank in Shanghai.

While some suspected that the central bank may have been behind the dollar sales, most traders saw little incentive for the central bank to support the yuan at present.

Having reversed a weakening trend in July, the Chinese currency is already near its 2012 high, and officials have expressed concern about China's ability to meet its export growth target this year.

Bank of China's motivation for selling dollars may be simply a case of cutting exposure ahead of next week's holiday, the city commercial bank trader said

"They may have built up a large long dollar position, and now with the holiday coming, they would lose a lot of money on the carry, so they want to exit," he said.

A bank that wanted to carry a long dollar position through the long holiday would have to hedge the position by borrowing yuan in the forex swap market. Such swaps are currently expensive due to tight yuan liquidity in the domestic money market.

The cost of carry would also be heightened by the length of the holiday as the swap would be needed for a longer duration. (Editing by Sanjeev Miglani)

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