* PBOC sets higher midpoint on weaker dollar index
* Yuan gets temporary boost from flash PMI
* Liquidity is good but volatility remains restrained
-trader
By Pete Sweeney
SHANGHAI, April 23 (Reuters) – China’s yuan strengthened
slightly on Monday after the central bank set a stronger
midpoint, but banks remained reluctant to test the widened
trading band, which regulators increased to 1.0 percent from 0.5
percent as of April 16.
Spot yuan opened at 6.3050 per dollar, 35 points
firmer than Friday’s close and was trading around 6.3069 by
midday.
Before trade began, the People’s Bank of China set the
yuan’s midpoint to the dollar at 6.2970, 72 pips
stronger than Friday’s fix, in response to a slight weakening in
the dollar index late last week. The dollar index fell to
79.184 at Friday’s close from 79.561 at end of Thursday.
A trader at a state-owned bank said that market liquidity
remained ample but trading activity was light.
The yuan continued its habit of starting out trading below
the midpoint, as it has done since mid-March. Market players say
the phenomenon indicates traders’ relatively conservative
attitude toward the midpoint fixing, as opposed to any
structural pressure for depreciation. Spot yuan has remained
within close range of the midpoint – around 0.2 percent –
throughout the period.
By midday, the yuan had only moved 0.015 percent away from
its morning fixing.
The yuan bounced back following reports that Chinese factory
activity had stabilised in April, but spot yuan remained below
the midpoint. The HSBC Flash Purchasing Managers Index, the
earliest indicator of Chinese industrial activity, showed a mild
recovery in output and export orders.
The furthest distance the yuan has traded away from the
midpoint since the widened band was implemented was 0.22
percent, which occurred on April 16, the day the new policy was
put into effect.
“This is not the central bank controlling things in the
backgound,” said a trader at a joint-stock bank. “The banks
themselves are still cautious about testing the new range.”
A trader at a state-owned bank concurred that the
range-bound trading was not in response to policy guidance.
“Just because the system is more market-driven now does not mean
volatility must be high,” he said.
One year non-deliverable yuan forwards (NDFs)
also strengthened slightly on Monday but remained weaker than
spot yuan, trading at 6.3370 by midday. Market players say NDFs
are no longer reliable indicators of market expectations for the
yuan’s future value.
The yuan touched 6.3471, its weakest point of the year, on
March 14, after a series of progressively weaker midpoints in
early March. The central bank then reversed course, guiding the
currency higher over the next week with stronger fixings to a
high of 6.2840 on March 27, a net spread of 0.99 percent.
(Editing by Jacqueline Wong)
