SHANGHAI: The yuan rose to its strongest level in over a month on Monday after, tracking the strength of non-dollar currencies following a new deal announced by euro zone leaders on Friday to tackle the region's deepening debt crisis.
"It looks like at least for the next few months there'll be a respite," said a trader at a city commercial bank in Shanghai.
He predicted the yuan would strengthen in the third quarter, following a fall of 0.9 percent in the second quarter, its weakest quarter on record.
The yuan touched a high of 6.3461 per dollar at mid-morning, after the central bank set its midpoint 103 pips stronger at 6.3146. It closed at 6.3488, the strongest close since May 29.
Under pressure to prevent a catastrophic breakup of their single currency, euro zone leaders agreed on Friday to let their rescue fund inject aid directly into stricken banks from next year and intervene on bond markets to support troubled member states, though details were sketchy.
The good news from the euro zone made the spot market more willing to follow the central bank's stronger midpoint. The People's Bank of China (PBOC) had set its fixing at 6.3040 on June 21, but spot yuan touched a high of only 6.3610.
Other traders were less sanguine on the euro, noting that the cycle of short-lived rallies following previous euro zone agreements has been repeated many times.
"It's like the weather. If it's been raining for many days and then the sun comes out, your mood will improve a bit. But it won't last," said a trader at a major state-owned bank in Beijing.
Despite contrasting predictions on the euro, traders generally agree that this trend will largely determine the value of the yuan.
"Whether it's the midpoint price or the interbank spot price, the link with the dollar index is really quite strong," Beijing trader.
Traders have also noted that the central bank has apparently adopted 6.37 as a de facto floor for the yuan's value. When the spot price approaches that level, large banks tend to step in to support the yuan, most likely acting as a conduit for central bank intervention.
"The big banks take turns offering liquidity," said the city commercial bank trader, describing what happens when the yuan falls near the 6.37 threshold.
Offshore yuan changed hands at 6.3540 late on Monday afternoon, a discount of 0.08 percent to the spot rate, little changed from a 0.06 discount at Friday's close.
