Yuan edges up vs dollar, market wary of currency war risk
* 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. . >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> 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 >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> (Editing by Jacqueline Wong)
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