China's yuan inches up on central bank guidance

China's yuan inched up against the dollar on Tuesday, after the central bank set the official guidance rate higher. -- PHOTO: BLOOMBERG
China's yuan inched up against the dollar on Tuesday, after the central bank set the official guidance rate higher. -- PHOTO: BLOOMBERG

SHANGHAI (REUTERS) - China's yuan inched up against the dollar on Tuesday, after the central bank set the official guidance rate higher.

The People's Bank of China (PBoC) set midpoint rate at 6.1179 per dollar prior to market open, 0.04 per cent firmer than the previous fix at 6.1205.

The spot market opened at 6.1980 per dollar, but quickly surrendered gains to trade in a narrow range during the morning trading session. By midday, the spot rate was changing hands at 6.2050, firming 0.01 per cent from the previous close.

"The trading volume is light today," said a trader at an Asian bank in Shanghai, "The market still lacks clear direction to trade on either side." China's consumer inflation eased in May, while producer prices fell for the 38th straight month, raising concerns about growing deflationary pressures as the economy cools.

Traders said the inflation data does not have the immediate impact on the currency market.

The offshore yuan was trading at 6.2107 per dollar, 0.09 per cent weaker than the onshore spot rate.

Offshore one-year non-deliverable forwards contracts (NDFs), considered the best available proxy for forward-looking market expectations of the yuan's value, traded at 6.2415, 1.98 per cent weaker than the midpoint.

One-year NDFs are settled against the midpoint, not the spot rate. Now that the trading band has been widened to 2 per cent in either direction, corporates are much warier of using the NDF to hedge given the basis risk inherent in them.

As a result the NDF market has lost liquidity in recent years and has frequently proven an unreliable measure of sentiment.

The yuan market at a glance:

Onshore: Item Current Previous Change PBOC midpoint 6.1179 6.1205 0.04% Spot yuan 6.205 6.2056 0.01% Divergence from midpoint* 1.42% Spot change ytd -0.02% Spot change since 2005 revaluation 33.38% *Divergence of the dollar/yuan exchange rate. Negative number indicates that spot yuan is trading stronger than the midpoint. The People's Bank of China (PBOC) allows the exchange rate to rise or fall 2 per cent from official midpoint rate it sets each morning.