China's yuan firms, due to dollar slide rather than PBOC's rate hike
Shanghai (Feb 3) China's yuan firmed against the dollar on Friday, the first trading day after a long holiday, with traders crediting the gain to the dollar's weakening during the closure and not the Chinese central bank's surprise short-term interest rate hike.
The rate increase piled pressure on China's bond market, but currency traders shrugged it off as not targeting the yuan .
The People's Bank of China set the yuan's midpoint rate at 6.8556 per dollar prior to market open, firmer than the previous fix of 6.8588 on Jan. 26 - the last trading day before the one-week Lunar New Year break.
The dollar index , versus six other major currencies rose slightly on Friday, to 99.910 as of 0830 GMT, but was on track to shed 0.6 percent for a week in which it touched 99.233, its lowest since late November.
Spot yuan was below midpoint as banks' clients rushed to purchase relatively cheap dollars after the long holiday, traders said.
The spot market opened at 6.8650 per dollar and settled at 6.8740 as of 0830 GMT, more than 0.2 percent softer than the midpoint but 67 pips firmer than the Jan. 26 late session close.
The People's Bank of China (PBOC) surprised markets by raising short-term interest rates, in a further sign that it is slowly moving to a tighter policy bias as the economy shows signs of steadying.
The PBOC said it raised the interest rate on reverse repurchase agreements (repos) in open market operations by 10 basis points, effective immediately. Theoretically, tighter policy should encourage support the Chinese currency by attracting funds to China. However, traders said there were very limited impact on the yuan market.
"What we have seen in the market today was still stronger dollar demand," a trader at a Chinese bank in Shanghai said, adding that clients stock up on dollars whenever the greenback gets cheaper.
Higher domestic interest rates would reduce the attractiveness of higher U.S. rates, and possibly brake capital outflows, Iris Pang, senior China economist at Natixis said in a note.
But Pang did not see Friday's move as the start of a tightening cycle, where liquidity is reduced, noting there was still ample funds in the system but at a higher cost.
Bond prices edged down immediately after the adjustment was made.
The most-traded 10-year treasury futures contract for June delivery closed down 0.82 percent, after falling as much as 1.5 percent in early trade.
Yields on benchmark 10-year Chinese treasury bonds closed at 3.398 percent, after hitting a high of 3.450 percent in early trade.
The Thomson Reuters/HKEX Global CNH index , which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 95.58, firmer than the previous day's 95.48.
The offshore yuan was trading 0.69 percent away from the onshore spot at 6.8250 per dollar.
Offshore one-year non-deliverable forwards contracts (NDFs) , considered the best available proxy for forward-looking market expectations of the yuan's value, traded at 7.12, 3.71 percent weaker than the midpoint.
One-year NDFs are settled against the midpoint, not the spot rate.
The yuan market at 0834 GMT:
ONSHORE SPOT: Item Current Previous Change PBOC midpoint 6.8556 6.8588 0.05% Spot yuan 6.8720 6.8807 0.13% Divergence from 0.24% midpoint* Spot change YTD 1.09% Spot change since 2005 20.44% revaluation
Source: KitcoNews
