Yuan weakens vs dollar, volatility remains healthy

Tue Jun 29, 2010 6:52am EDT

Related Topics

* Spot yuan dips to 6.7977, caution on appreciation outlook

* Volatility lets banks compete for business in onshore mkt

* One-year dlr/yuan NDFs at 6.6870, imply less yuan rise

* Offshore implied dlr/yuan volatility eases to 4.60 pct

By Lu Jianxin and Koh Gui Qing

SHANGHAI, June 29 (Reuters) - The yuan CNY=CFXS weakened slightly against the dollar in the onshore spot market and offshore forwards on Tuesday as investors saw little opportunity for the Chinese currency to appreciate sharply in the near term after the end of the G20 summit over the weekend.

But the yuan continued moving in a relatively wide range of 57 pips, enough to allow banks to compete for business from various clients, traders said, although that was slimmer than last week's unusually hefty average daily range of more than 200 pips.

During the two years from mid-2008 until last week, when the People's Bank of China abandoned the yuan's peg to the dollar, the yuan rarely moved more than a few pips on any given day.

The PBOC, China's central bank, had used the yuan's daily mid-point, or reference rate, to set limits on how much the yuan could move each day.

With the PBOC usually tweaking the mid-point by only one or two pips each day, banks trading at quotes far from the reference rate on a given day would end up having to cover their positions around the mid-point in subsequent days, eventually discouraging trade that strayed far from the mid-point.

But since the PBOC announced that China would give up the two-year peg on June 19, the central bank has set the mid-point in a much broader range, allowing the yuan to trade more widely.

That permits banks to offer more favourable quotes to a variety of clients and to compete for business, traders said. ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> Full coverage [ID:nCHINATAKE] PDF on yuan: r.reuters.com/fuk43m Yuan microsite: china.thomsonreuters.com/yuan/ Yuan graphics: r.reuters.com/byq23m Insider TV

-- G20 wrong place for yuan r.reuters.com/vyx64m ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

"Market expectations of yuan appreciation have cooled since the G20 summit, with many believing last week's brief spike in the yuan against the dollar was only a goodwill gesture from China to the summit," said an Asian bank dealer in Shanghai.

"But the abolition of the peg appears to have resulted in a wider trading range for the yuan, adding activity to the market."

The PBOC set the mid-point CNY=SAEC at 6.7901 to the dollar before trading started on Tuesday, down slightly from Monday's 6.7890.

The yuan traded in a range of 6.7942 to 6.7999 before ending at 6.7977, compared with Monday's close of 6.7967. It was the second day that the yuan closed slightly lower, after hitting its highest since the July 2005 revaluation on Friday and rising 0.5 percent in the first week after the depegging.

No one in the market believes, however, that China would let the yuan appreciate at an annualised pace of more than 20 percent, as it did last week.

Offshore, benchmark dollar/yuan one-year non-deliverable forwards (NDFs) rose slightly to 6.6870 bid in late trade compared with Monday's close of 6.6750, with implied yuan appreciation over that period falling to 1.54 percent versus 1.71 percent, as measured from the PBOC's spot mid-point.

One-year dollar/yuan implied volatility CNY1YO= dropped slightly to 4.60 percent from Monday's close of 4.65 percent, reflecting reduced expectations of movement over the next year. (Editing by Edmund Klamann)

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