* PBOC signals stability preference with flat midpoint
* Yuan hits top-side limit for seventh straight session
* But traders say recent yuan rally could peter out soon
* C.bank unwilling to intervene directly to ease liquidity
By Gabriel Wildau
SHANGHAI, Nov 30 (Reuters) – The yuan traded flat on Friday
morning after the central bank held its midpoint unchanged,
signaling its commitment to keeping the currency steady in spite
of market forces pushing for appreciation.
The yuan opened exactly where it closed on
Thursday – at 6.2263 versus the dollar, the strongest level
permitted by the central bank’s midpoint – and stayed there
through the morning, apart from a few trades.
Friday’s midpoint was 6.2892, unchanged from
Thursday’s fix.
The People’s Bank of China (PBOC) allows the exchange rate
to rise or fall 1 percent from the midpoint it sets each
morning.
Trading volumes have suffered in recent weeks as would-be
dollar buyers have stayed out of the market in expectation that
the yuan will rise further.
Yet the PBOC has not intervened in the market to provide
yuan liquidity, surprising some market participants.
The PBOC’s decision not to intervene directly, even as its 1
percent daily trading band remains in place, has created
deadlock in the market.
AN END TO THE YUAN RALLY?
In a guest column for Reuters Chinese News published on
Thursday, Fu Qing, head of FX trading in China for Standard
Chartered, said that while a resurgent trade surplus in recent
months and signs of recovery in the macro-economy were important
factors supporting the yuan’s rally, a “herd effect” is also
driving the market.
“The reason the yuan is continuously rising recently is
mainly because the market yuan hit its top-side limit multiple
times, which provoked panicked (yuan) buying by some companies,
creating a vicious cycle,” he wrote.
In the first half of 2012, the yuan weakened. Around
mid-year, some banks were telling corporate clients that the
yuan could fall to as low as 6.5 to 6.6, Fu said. That caused
corporates with dollars on hand to delay trading them for yuan.
But an abrupt reversal caught many firms off guard. The yuan
hit a 2012 low point of 6.3967 in late July but has since
recovered by 2.7 percent. It has gained 1.1 percent against the
dollar this year.
Fu believes the yuan rally is likely to lose steam early
next year. He pointed out that medium- to long-term onshore
forwards are currently priced very close to the
level implied by interest-rate parity. That means appreciation
expectations are having a minimal impact.
He also pointed to data from the State Administration of
Foreign Exchange showing that while corporate yuan purchases
exceeded dollar purchases in recent months, the volume of yuan
purchases was still well below China’s trade surplus.
That means corporates are still not converting all of their
FX receipts into yuan, even as the Chinese currency appears to
be on a clear appreciation path.
That contrasts with the pattern of previous years, when
entrenched yuan appreciation expectations caused corporate yuan
buying far in excess of the trade surplus. Such excess yuan
purchases allowed companies to profit from the one-way bet on
appreciation.
Fu said the central bank has greatly reduced its direct
interventions in the market this year and is determined to
maintain that hands-off stance, preferring to let the market
sort out the supply/demand balance on its own.
If the bank intervened now to provide yuan liquidity –
effectively intervening to weaken the currency – that would
create the expectation that if the yuan again begins to
depreciate, the bank would again step in, he said, this time to
inject dollars.
(Editing by Richard Borsuk)
