China's yuan edged up against the dollar on Wednesday after the central bank set a stronger midpoint, but the upside is seen as limited given expectations of further policy easing to support the cooling economy.
The People's Bank of China set the midpoint rate at 6.1156 per dollar prior to market open, firmer than the previous fix of 6.118.
The spot market opened at 6.2045 per dollar and was changing hands at 6.2022 near midday, 40 pips stronger than the previous close and 1.42 percent weaker than the midpoint.
The spot rate is allowed to trade with a range 2 percent above or below the official fixing on any given day.
"The authorities would continue to guide the midpoint to forestall excessive appreciation of the yuan in the face of a still soft economy and a potentially stronger broad dollar," OCBC analysts said in a note sent to clients.
The offshore yuan was trading -0.05 percent weaker than the onshore spot at 6.205 per dollar.
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 6.265, or 2.38 percent weaker than the midpoint.
One-year NDFs are settled against the midpoint, not the spot rate, and now that the trading band has been widened to 2 percent in either direction, corporates are much warier of using the NDF to hedge given the basis risk inherent in them.
As a result the market has lost liquidity in recent years and has frequently proven an unreliable measure of market sentiment.
The devaluation of currencies by some countries has led to sharp gains in the yuan which are hurting the competitiveness of Chinese exports, the trade ministry said on Tuesday.
The Ministry of Commerce did not identify the countries which it said were devaluing theircurrencies, while promising China would keep the yuan at a "basically stable" level.
original source: http://uk.reuters.com/article/2015/05/06/uk-markets-china-yuan-midday-idUKKBN0NR06V20150506