* Midpoint set weaker for first time this week
* Spot prices tightly range-bound
SHANGHAI, Aug 8 (Reuters) – The central bank set the yuan
midpoint slightly weaker versus the dollar on Wednesday morning
for the first time this week, while spot trade remained flat.
The People’s Bank of China set the yuan midpoint
at 6.3778 at market open, slightly weaker than Tuesday’s fix.
Spot prices, however, stayed flat and traded in an
extremely tight range through midday.
Spot yuan opened at 6.3725, slightly softer than Tuesday’s
close, and was trading at 6.3680 in midday trade. The currency
had yet to move outside a 20-point range by midday.
As a result of the weaker midpoint and the flat spot price,
the gap between the two has narrowed, continuing a narrowing
trend that began on July 20 when the spot price closed 623 pips
away from the fixing, compared to 297 pips in midday trade on
Wednesday.
Regulators widened the trading band — the maximum spot
prices are allowed to move away from the fixing — to 1 percent
from 0.5 percent in April.
Traders explain the spot yuan’s newfound tendency to trade
below the fixing in 2012 as indicating the state of market
demand, as investors stock up on dollars.
The central bank, which once limited its operations to
buying dollars, has become a dollar supplier to the market as
Chinese corporates — in particular oil companies — attempt to
replenish dollar reserves and hedge against further yuan
depreciation.
In addition traders say the bank appears to have
occasionally intervened to prevent the yuan from depreciating
more abruptly.
Economists once widely agreed that the yuan would appreciate
mildly this year, but the Greek debt crisis changed the equation
by driving corporates and sovereigns to seek haven in dollars.
The ensuing “dollar shortage” has pushed the dollar index
up its basket of currencies, a basket dominated by the euro.
It has also complicated Beijing’s currency strategy. Letting
the currency trade more widely has allowed the yuan to exhibit
two-way volatility, a key step toward allowing full
internationalisation and convertability.
But the yuan continues to trade at decade highs against the
euro, and Europe buys one-fifth of Chinese exports.
Traders now believe the yuan could depreciate a further 1
percent against the dollar in 2012. It has already slid around
1.4 percent.
Mainland banks have reported net yuan selling by clients in
spot and forward markets, and this has been reflected by
offshore forwards as well.
The one-year non-deliverable forward contract
traded at 6.4235 at midday, a wide discount from spot prices,
indicating both a difference in interest rates between Hong Kong
and the mainland and expectations for yuan depreciation.
The offshore yuan spot (CNH) remains close to the
onshore version, trading at 6.3720 at midday.
(Reporting by Pete Sweeney; Editing by Eric Meijer)
