SHANGHAI (REUTERS) - China's yuan reversed earlier declines to close slightly stronger against the dollar on Wednesday, with volumes surging to the second biggest since records were available.
Traders said the market was increasingly divided over the currency's direction after the People's Bank of China (PBOC) on Tuesday cut the one-year benchmark bank lending rate by 25 basis points and reserve requirements by 50 basis points for most big banks.
Monetary easing will put more pressure on the yuan to depreciate, but the market believes the central bank may also be more determined to defend the currency's value if necessary, traders said.
Spot yuan closed slightly firmer at 6.4105 per dollar. It opened at 6.4181 per dollar, moving in a wide range of 6.4032 and 6.4293 during the day.
After monetary easing, the PBOC seemed to intervene little to prop up the yuan, traders said.
The market was uncertain where the yuan was heading, with many believing that despite long-term prospects for further depreciation, the currency could find support at 6.5/dollar in the medium term. "Banks as well as their clients are divided," said a trader at a European bank in Shanghai. "More sales and purchases stemming from the differences pushed volumes up sharply."
Volume reached US$49 billion (S$68.7 billion) on Wednesday, up from US$37.2 billion on Tuesday and lagging only the Aug. 12 record of US$56.8 billion. Wednesday's volume was the second biggest since available data from May 2013.
On Wednesday, the central bank set the midpoint rate at 6.4043 per dollar prior to market open, the official guidance rate's weakest level in four years. "The central bank set its midpoint weaker than 6.4 following the offshore market reaction to the easing signals that the yuan is more market-oriented now," said a trader at a Chinese commercial bank in Beijing. "But less intervention has given rise to concerns on the yuan's continuing depreciation." However, Premier Li Keqiang was quoted by state television on Tuesday as saying that there is no basis for continued depreciation of the yuan.
Offshore yuan was trading 1.14 per cent lower than onshore spot at 6.493 per dollar.
Economists at OCBC in Singapore said: "It not the first time for China to roll out jumbo easing, however it is the first time for China to ease aggressively when the consensus view is shifting towards RMB depreciation. Therefore, we see a good chance that RMB may weaken further in both onshore and offshore market."
"This suggests that China's policymakers may have higher tolerance for RMB weakness. Nevertheless, given China's strong trade surplus, we see no basis for RMB to weaken significantly. Our call for a 6.30-6.50 range for USDCNY remains unchanged."