Yuan edges up in NDFs, political risks re-emerge | business | Hindustan Times
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Yuan edges up in NDFs, political risks re-emerge

business Updated: Jun 24, 2010 10:45 IST

Reuters
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Dollar/yuan offshore forwards edged lower on Thursday, implying slightly higher yuan appreciation that dealers said was now settling at reasonable levels after the weekend's official depegging from the dollar, although political risks resurfaced.

Political concerns intensified overnight when several U.S. lawmakers renewed calls for legislation to press China on yuan appreciation, casting uncertainty over how willing the People's Bank of China will be to allow the yuan to move in the short term and making even a slight yuan rise implied in NDFs appear potentially risky.

Spot yuan drifted lower against the dollar as some banks and their clients now have too few dollars on hand, after the PBOC's weekend announcement it would depeg the yuan from the the U.S. currency spurred them to aggressively sell dollars on Monday, to bet on yuan appreciation.

Trading was sluggish on Thursday, after China's state-owned banks bought dollars heavily on behalf of the PBOC in the spot market on Tuesday and continued sporadic buying on Wednesday, dealers said, effectively helping the Chinese central bank to take back control of the yuan's value by draining dollar supply.

"After a flood of dollars into the (spot) market, those who sold them too cheaply early in the week must buy them back at higher prices if they need them," said a dealer at a major Chinese commercial bank in Shanghai.

"The market has had to learn that the central bank is still in firm control of the yuan's value. With speculation dying down, real demand is pushing the dollar slightly higher."

The yuan was quoted at 6.8134 to the dollar at midday, slightly weaker than Wednesday's close of 6.8124 and Thursday's central bank mid-point of 6.8100, which was little changed from Wednesday's mid-point of 6.8102.

The yuan moved in a 57-pip range on Thursday, shrinking from the daily ranges of 300 pips or more early in the week but still much wider than the moves of only a few pips per day seen during most of the two-year dollar peg.

POLITICAL RISKS

U.S. senators said on Wednesday they were unmoved by China's steps to partially free the yuan since the weekend and vowed to push forward legislation to punish a yuan misalignment they say distorts trade and steals U.S. jobs.

China announced over the weekend that it would allow the yuan's exchange rate to move more freely but it has made it clear that its currency reform would be gradual and controllable.

It is widely believed in the domestic market that China will not concede any more from its present stance and fresh pressures from U.S. lawmakers are very likely to backfire.

"Market and economic conditions have changed so much since the global financial crisis that it is unrealistic to think China still has firm plans to allow the yuan to appreciate to a certain degree in a certain period of time," said a senior trader at a major European bank in Shanghai.

"The best China can do is to show that it is friendly, it is cooperative and it is willing to change in line with market and economic conditions."

The latest euro zone debt crisis has cast doubt on the pace of China's economic recovery, giving a warning to Beijing once again how vulnerable the world's third-largest economy is to a global slowdown.

Chinese economists often argue that Western critics underestimate that vulnerability, especially given how far China's per capita income lags developed countries.

They say it may be inappropriate to apply Western standards to the currency of a country
whose per capita GDP is only one-20th that of the United States.

Caution about Beijing's stance was reflected in the offshore forwards markets, where speculators were wary about shorting dollars and suspected that Beijing's currency moves after the weekend were aimed primarily at appeasing critics before the G20 summit late this week.

Benchmark one-year dollar/yuan NDFs eased to 6.6670 bid by midday from Wednesday's close of 6.6700, with implied yuan appreciation over that period rising to 2.14 percent from 2.10 percent the previous day.

Three-month NDFs' implied yuan appreciation rose to 0.62 percent from Wednesday's 0.56 percent, as measured from the central bank's spot mid-point.

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