The yuan edged up against the US dollar on Tuesday, after the central bank fixed the strongest midpoint this year and state-banks apparently intervened to narrow the increasing spread between the spot rate and midpoint.

The People’s Bank of China set the midpoint rate at 6.4565 per dollar prior to market open, only 0.04 percent firmer than the previous fix 6.4589, as a strengthening euro and yen offset a tumble in the dollar index.

The spot market opened at 6.4775 per dollar and was changing hands at 6.4731 at midday, strengthening 0.09 per cent from the previous close but 166 pips weaker than the midpoint.

“The spread between the spot rate and the midpoint once hit a high of almost 200 pips in the morning, which is abnormal,”said a trader at a Chinese commercial bank in Shanghai.

“State-banks had intervened between 6.4750 and 6.4760 in early trade before engaging in a dollar-selling frenzy. The spot rate firmed further as a result.” State-owned banks appeared to withhold dollar liquidity on Friday, allowing the yuan to drift away from the midpoint as far as 300 pips softer. They used to step into the market when the spot rate traded around 50-100 pips away from the midpoint, traders said.

The United States on Friday put China and four other countries on a new monitoring list mostly due to their large surpluses, to address possible unfair currency practices.

Adding to the worries that China’s recent economic pick-up might be short-lived, activity in the country’s manufacturing sector expanded for the second month in a row in April but only marginally, an official survey showed on Sunday.

The latest China Foreign Exchange Trade System (CFETS) data showed that the index for the yuan’s value based on the market’s trade-weighted basket stood at 97.12 last week, the lowest on record. The index was first published by CFETS in December 2015, setting the yuan’s value at 100 at the end of 2014.

The offshore yuan was trading 0.12 per cent weaker than the onshore spot at 6.4812 per dollar.

Offshore one-year non-deliverable forwards contracts , considered the best available proxy for forward-looking market expectations of the yuan’s value, traded at 6.495, or 2.90 per cent softer than the midpoint.

Apr. 29, 2016 on Reuters

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