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Bank of China dollar sales keep yuan flat before holiday week
September 26, 2012 / 5:30 AM / 5 years ago

Bank of China dollar sales keep yuan flat before holiday week

* Most banks see elevated dollar demand near Oct holiday

* Bank of China selling dollars heavily in recent days

* Spot yuan near stronger than fix by near-record margin

By Gabriel Wildau

SHANGHAI, Sept 26 (Reuters) - The yuan was mostly flat at midday on Wednesday as unusual large dollar sales by Bank of China , according to traders, counteracted elevated demand for the greenback ahead of a week-long holiday beginning Monday.

Spot yuan traded at 6.3072 per dollar, six pips weaker than Tuesday’s close. The central bank, the People’s Bank of China (PBOC), set its daily midpoint 13 pips weaker at 6.3443 after the dollar gained in global markets overnight.

Opinions differ about the effect of the holiday, but most traders now say that dollar demand from corporate clients is elevated near month end, with Mid-Autumn Festival 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 there were some suspicions 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 be also heightened by the length of the holiday as the swap would needed for a longer duration.

As the yuan has strengthened over the last two months, it has strayed increasingly far from the central bank’s midpoint on the strong side. On Friday it closed at the widest premium to the midpoint on record, at 0.6 percent, though larger premiums have occurred intraday. (Editing by Simon Cameron-Moore)

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