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China’s Yuan Drops and Seen Going Lower

Picture taken 13 October 2007, shows a CPicture taken 13 October 2007, shows a C

China’s yuan eased against the dollar on Wednesday, despite a firmer midpoint setting by the central bank.

The People’s Bank of China set the midpoint rate at 6.4936 per dollar prior to the market open, 0.05% firmer than the previous fix of 6.4971. In the spot market, the yuan opened at 6.4847 per dollar and was changing hands at 6.4901 at midday, easing only 0.03% from the previous close.

“During the past three days of trade, the yuan was trading a bit stronger than the midpoint, with state banks offering prices around the official fix, offsetting any surge in dollar demand,” said a dealer at a Chinese commercial bank in Shanghai.

While officials have said recently that two-way fluctuations in the currency will be allowed “within a reasonable range,” and as determined by market demand, traders remain cautious.

Still, onshore one-year yuan/dollar deliverable forwards were quoted at 6.5812 around midday, implying expectations of a bigger depreciation over 12 months than seen in Tuesday’s close of 6.5686.

An official at the country’s foreign exchange regulator said on Tuesday that China is studying a Tobin tax on transactions as a possible policy tool to curb capital outflows, even though such flows have eased in recent months.

 

Offshore one-year non-deliverable forwards contracts , considered the best available proxy for forward-looking market expectations of the yuan’s value, traded at 6.6675, 2.61% weaker from the midpoint.