BEIJING: China's yuan strengthened against the dollar on Wednesday, recovering from a sharp slide in the previous session, with some traders suspecting the central bank is propping up the currency behind closed doors in the name of maintaining stability.
The spot yuan lost more than 0.5 per cent against the dollar in intraday trade on Tuesday, in what would have been its sharpest daily decline since 2008, as corporates bailed out of yuan in the face of disappointing trade indicators and rumours of monetary easing, seen as diluting the yuan's relative value.
The sharpness of the slide tested the People's Bank of China's (PBOC) public commitment to reduce intervention in the currency market in the name of broader financial reform, which it backed up with a liberalisation of the currency's trading band, widened to 2 per cent on either side of the midpoint this year.
However, while easing is supposed to be bearish for the yuan, the central bank has been bullish with its guidance rate , pushing it to firm by 0.35 per cent since Dec 4, considered a signal to the market to maintain rate stability.
However, markets shrugged off that guidance on Monday and Tuesday, and some traders believe the PBOC blinked on Wednesday, and instructed intermediaries to buy up yuan to head off a herd movement out of renminbi.
"As the PBOC is suspected of having come into the market to support the yuan, the yuan is likely to stabilize around 6.2 to the dollar in the near term," said one trader at a Chinese bank in Shanghai.
The spot market opened down slightly from the previous close before rebounding to change hands at 6.178, up 0.12 per cent.
Whether the PBOC did indeed intervene behind the scenes is difficult to discern. Another trader at a Chinese bank in Shanghai said the PBOC had not intervened and would not enter the market unless there was a larger, more sustained movement in the yuan.
In spite of the central bank's efforts to support the yuan, the spot rate was 0.96 per cent below the midpoint at midday.
The currency has consistently traded below the midpoint since last week.
Following on the central bank's surprise interest rate cut last month, it is predicted to cut the reserve requirement ratio, which would flood the market with yuan and dilute its value.
Lower consumer inflation figures released on Wednesday could further pave the way for an RRR cut, ANZ economists wrote in a note. Consumer inflation fell to 1.4 per cent in November, down from 1.6 per cent and missing expectations.
original source: http://articles.economictimes.indiatimes.com/2014-12-10/news/56917760_1_pboc-guidance-rate-yuan