Yuan edges up vs dollar, market wary of currency war risk

Wed Feb 20, 2013 12:10am EST

Related Topics

* Yuan trades at 6.2423/dollar, up 0.03 pct
    * China central bank fixes midpoint 0.3 pct stronger
    * No impact from weak China January FDI data

    By Lu Jianxin and Pete Sweeney
    SHANGHAI, Feb 20 (Reuters) - The yuan rose slightly on
Wednesday after the People's Bank of China (PBOC) set its daily
midpoint slightly higher to reflect a fall in the dollar in
global markets, traders said.
    The market is increasingly wary of the growing risk of Asian
countries devaluing their currencies to protect exports, but
ignored a decline in China's foreign direct investment (FDI)
inflows, traders said.
    Spot yuan was trading at 6.2423 per dollar near
midday, up 0.03 percent from 6.2443 at Tuesday's close.
    Volume was heavy at $13.52 billion on Wednesday morning, up
from Tuesday morning's $7 billion, with traders reporting some
clients selling off dollars to take advantage of the yuan's
relatively solid level on Wednesday.
    Before trading began, the PBOC set the yuan's midpoint at
6.2804, 0.3 percent stronger than Tuesday's midpoint of 6.2821
and inversely tracking the dollar index, which fell
slightly overnight.
    In the latest sign of worries that Asian countries may push
down the value of their currencies, as Japan has done, the New
Zealand central bank said on Wednesday that the New Zealand
dollar was significantly overvalued compared with its economic
fundamentals. 
    Reserve Bank of New Zealand Governor Graeme Wheeler said
part of the currency's strength reflected global imbalances, 
knocking the currency down by nearly half a cent.
    Caution has increased since the weekend, when a statement 
by G20 policymakers did not single out Japan for its actions to
devalue the yen. 
    The market largely interpreted the statement as de facto
acceptance of Japan's recent expansionary monetary policies,
which have contributed to a weaker yen. 
    In another related development, China's FDI inflows in
January fell 7.3 percent from a year earlier, extending 2012's
series of consecutive year-on-year declines that highlights
still sluggish global economic conditions. 
    The Commerce Ministry said on Wednesday that China drew
$9.27 billion in FDI in January, down from December's $11.7
billion. Investment inflows from key Asian economies and the
U.S. were down in the latest period. 
    
  The onshore spot yuan market at a glance: 
 Item               Current   Previous  Change
 PBOC midpoint        6.2804    6.2821    0.03
                                        
 Spot yuan            6.2423    6.2443    0.03
                                        
 Divergence from       -0.61                  
 midpoint*                              
 Spot change ytd       -0.19                  
 Spot change since 2005 revaluation     +32.59
 *Divergence of the dollar/yuan exchange rate. Negative number
indicates that spot yuan is trading stronger than the midpoint.
The PBOC allows the exchange rate to rise or fall 1 percent from
official midpoint rate it sets each morning.

    OFFSHORE CNH MARKET   
    The offshore yuan traded in Hong Kong (CNH)          remains
at a premium to the onshore version. Analysts say this is partly
due to the fact that the offshore yuan is not bound by the
official midpoint, which keeps the exchange rate within 1
percent on either side of the fix.                
    One-year non-deliverable forwards, considered an imperfect
indicator of future expectations for yuan appreciation or
depreciation, were quoted at rates implying depreciation over
the next 12 months.
    
The offshore yuan market at a glance:    
 Instrument                Current     Difference from
                                       onshore (pct) 
 Offshore spot yuan        6.2380      +0.07*
                                       
 Offshore non-deliverable  6.3190      -0.61**
 forwards                              
 
*Premium for offshore spot over onshore 
**Figure reflects difference from PBOC's official midpoint,
since non-deliverable forwards are settled against the midpoint.
. 
    
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    MARKET DRIVERS
    - G20 promises unlikely to end devaluation debate
 
    - China restrains yuan rise in response to Asian currency 
weakness 
    - Corporates get tough lesson in FX risk from central bank
 
    - Offshore yuan premium returns as market bets on
appreciation 
    - Spot yuan has rallied strongly since late July 2012, and
the PBOC is using its daily midpoint to restrain further
appreciation. GRAPHIC: link.reuters.com/pyx74t
    - China's trade surplus surged in late 2012, but the surge
was mainly due to weak imports rather than strong exports.
GRAPHIC: link.reuters.com/qav68s
    - Corporate yuan purchases still exceed dollar purchases,
but the gap is narrowing. Exporters are converting progressively
smaller portions of their foreign exchange receipts into yuan.
GRAPHIC: link.reuters.com/syx74t 
    - Hot money outflows may be putting downward pressure on the
yuan. GRAPHIC: link.reuters.com/saz74t
    - Despite relatively stable dollar/yuan exchange rate, the
yuan is appreciating on a trade-weighted basis. GRAPHIC: link.reuters.com/sed74t
    
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 (Editing by Jacqueline Wong)
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