* Yuan slips to 6.3055, erasing Monday’s losses
* Little impact from trade band widening
* New rules on overnight positions could reduce short
squeeze
* Rules also open door to increased speculation
By Gabriel Wildau
SHANGHAI, April 18 (Reuters) – The yuan edged lower on
Wednesday as the impact of the central bank’s recent widening of
the currency’s daily trading band faded and the market settled
into its familiar range.
Spot yuan traded at 6.3051 per dollar at midday,
36 pips weaker than Tuesday’s close, after the central bank set
a midpoint of 6.2948, 52 pips weaker than Tuesday’s fix.
The central bank’s announcement on Saturday of wider daily
trading band of 1 percent from 0.5 percent has so far had little
impact on the market.
“The first day’s volatility was a bit more than usual. But
in the last two days the market has digested the information, so
things are relatively stable,” said a trader at a Chinese
joint-stock bank in Shanghai.
In the medium term, traders say, the wider trading band will
lead to greater volatility intraday and over longer stretches.
For the moment, however, the market appears to have settled
firmly in a range around 6.29-6.32, so traders are not inclined
to speculate on broad movements.
“Supply and demand in the market are in a fairly balanced
place,” said a trader at a European bank in Shanghai.
A separate reform measure released late Monday allows banks
to carry short or long dollar positions overnight rather than
closing out their positions by the end of each day, as
previously required.
Although the move creates more space for institutions in
China’s interbank to take speculative positions on movements in
the currency, traders say that in the short term they will
remain cautious, as the increased volatility expected to result
from the widened trading band creates potential for losses.
“At this point, upward and downward volatility are both
possible, uncertainty is increased, so probably traders will
reduce their risk positions,” the trader said.
In the medium term, however, such speculation could rise as
traders become more accustomed to increased volatility and new
signals emerge about the trajectory of the yuan.
The impact of the new overnight position regulations may
actually reduce volatility, counteracting the increased
volatility expected to result from the wider trading band.
Under the previous regime, large dollar orders by corporate
clients sometimes led to a short squeeze as banks were forced to
buy dollars – even at a high price – to square their positions
within a short period to abide by the ban on carrying positions
overnight.
The new regulations give banks more flexibility to carry a
short position overnight, reducing the need to short-cover in a
hurry.
The central bank’s weaker fixing was a departure from its
normal practice of setting a stronger midpoint in response to an
overnight fall in the dollar index <.DXY, but at only 52 pips,
the magnitude of the shift was small.
(Editing by Chris Lewis)
