ET:Yuan ends up versus dollar, market expects another leg of appreciation
SHANGHAI: The yuan closed up versus the dollar on Friday, reversing earlier losses as the market bet the People's Bank of China might kick off another leg of yuan appreciation when the outcome of the Federal Reserve's meeting is clear.
The PBOC fixed the yuan's mid-point at an all-time high against the dollar on Wednesday but it abruptly interrupted the currency's rise on Thursday and Friday with weaker mid-points to the disappointment of the market, traders said.
However, many dealers said the PBOC might just want to wait for the outcome of the Federal Reserve's meeting later on Friday to decide how to let the yuan stage another leg of gains.
Global markets came into the week thinking Federal Reserve Chairman Ben Bernanke may announce a third round of asset purchases or some other extraordinary policy later on Friday in Jackson Hole, Wyoming, pressuring the dollar, but this view has changed over the last 24 hours or so.
"Yuan buying emerged late in the session as the market expects the trend of yuan appreciation to remain intact. And another leg of yuan appreciation may come as soon as next week," said a dealer at a US bank in Shanghai.
Spot yuan closed at 6.3868 per dollar, up from 6.3900 at Thursday's close. It has now appreciated 6.87 per cent since it was depegged from the dollar in June 2010 and 3.17 per cent so far this year.
Before trading began, the PBOC fixed the mid-point at 6.3950, slightly weaker than Thursday's 6.3936 but still within arm's reach from Tuesday's record high fixing of 6.3896.
The fixing is the central bank's base rate from which the yuan can move 0.5 per cent in either direction and expresses the government's intention of how the yuan should move.
The PBOC has engineered several rounds of yuan rises since the start of this year as China uses the currency to manage inflation and adjust its economic model, but it has also used a tactic of two steps forward, one step back in pacing the yuan's appreciation so as to deter speculation of non-stop rises.
Traders said they expected the yuan to break through its all-time trading high of 6.3820 set last week, within one or two weeks.
Offshore, the one-year dollar/yuan non-deliverable forwards (NDFs) were bid at 6.2925 in late trade, nearly flat from 6.2940 at Thursday's close. Their implied yuan rise in a year's time edged up to 1.62 per cent from 1.60 per cent.
