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China yuan edges up vs dollar in spot, NDF markets
Offshore, one-month dollar/yuan NDFs <CNY1MNDFOR=> were bid at 6.9925 against the dollar in late morning trade, implying slight yuan appreciation, after they were bid above 7.00 on Wednesday to imply future yuan depreciation for the first time since at least early 2006. (For story please click [ID:nSHA294701]) - SHANGHAI, May 15 - The yuan rose slightly against the dollar on Thursday in the spot and offshore non-deliverable forwards markets after the Chinese central bank pledged to continue to use the yuan's exchange rate to help fight inflation.
The spot yuan rate was at 7.0005 against the dollar in late morning trade, up from Wednesday's close of 7.0030. The central bank fixed the yuan's daily mid-point <CNY=SAEC> at 7.0000 to the dollar, down marginally from Wednesday's reference rate of 6.9987.
"The central bank's first-quarter report indicated that the government's currency policy has not changed, and this gave the yuan some support today," said a dealer at a major Chinese state-owned bank in Shanghai.
After the market closed on Wednesday, the People's Bank of China issued its quarterly monetary policy report reaffirming its commitment to making the yuan more flexible, partly as a tool in the fight against inflation, although it also stressed the need to step up controls on illegal capital inflows to buy time for currency reforms.
"Improving yuan flexibility can reduce crude oil prices in RMB terms, while increasing the prices of refined oil products in foreign currency terms," the central bank said in the report.
"This can help ease the lagging of our refined oil product prices behind crude prices," it said.
Offshore, one-month dollar/yuan NDFs <CNY1MNDFOR=> were bid at 6.9925 against the dollar in late morning trade, implying slight yuan appreciation, after they were bid above 7.00 on Wednesday to imply future yuan depreciation for the first time since at least early 2006. (For story please click [ID:nSHA294701])
SENTIMENT IMPROVES
The benchmark one-year NDFs <CNY1YNDFOR=> were bid at 6.6270, compared with 6.6450 late on Wednesday, implying yuan appreciation of 5.63 percent in 12 months from Thursday's spot mid-point, up from 5.32 percent implied on Wednesday.
The one-year NDFs' implied level of yuan appreciation was still less than half the 13.79 percent peak in mid-March, which was the highest since China revalued the yuan in July 2005.
Thursday's yuan rise represented a moderate recovery in sentiment towards the Chinese currency, which had been dampened when the central bank applied the brakes to yuan appreciation at the start of April.
Despite the recovery, dealers forecast the yuan's gains against the dollar in coming months would be less spectacular than the 4.2 percent surge in the first quarter -- an unprecedented pace since the 2005 revaluation.
"The central bank has used the slowdown in yuan appreciation since early April to warn against excessive speculation," said a dealer at a major European bank in Shanghai.
"We are unlikely to see the yuan rising again at a pace of more than 1 percent a month like it did in the first quarter, and the central bank could even engineer a brief pull-back if speculators bring too much hot money into the country," he said.
Onshore dealers expect the yuan to rise to 6.93 to 6.95 versus the dollar by the end of May, translating into a monthly gain of 0.5 to 0.9 percent, and by a similar pace in coming months.
They also maintained their forecasts for the yuan to rise 8.5 to 10 percent for all of 2008, with its first-quarter jump offsetting slower appreciation since early April.
China's annual consumer price inflation for April, released on Monday, quickened to 8.5 percent from 8.3 percent in March, holding near a 12-year high.
The central bank announced a 0.5 percentage point hike in banks' reserve requirements on Monday, the fourth such move this year, lifting the ratio for big banks to a record 16.5 percent when it takes effect on May 20.
Several dealers reported that some banks were buying dollars to prepare for the reserve hike as the central bank continued to require selected banks to settle reserve changes in dollars rather than in yuan, a policy ushered in last August.
"That capped the yuan's gain today," said a dealer at a major Chinese commercial bank in Shenzhen.
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