4th UPDATE: China Yuan Ends Down Vs Dollar On Debut Of Wider Trading Band
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-- Yuan's decline due to dollar's offshore strength, expectations for yuan to weaken amid a slowing economy.
-- Onshore forex swaps, offshore non-deliverable forwards are pricing in further yuan depreciation.
(Recasts the first paragraph, and updates prices throughout.)
By Shen Hong and Esther Fung Of Dow Jones NewswiresSHANGHAI (Dow Jones)--China's yuan finished weaker but well off its earlier lows against the U.S. dollar Monday in Asia, the first day it was allowed to trade in a widened daily range, as investors scaled back selling and realigned their view with the central bank's guidance for only mild weakness in the Chinese currency.
The dollar-yuan exchange rate closed at 6.3150, down from the intraday peak of 6.3250 shortly after the market opened, but up from 6.3030 late Friday.
"We're seeing some dollar demand due to expectations of short-term yuan depreciation following the widened trading band," said a Beijing-based trader at a local bank, noting the dollar's global strength amid renewed concerns about Europe's debt woes and China's slowing economy.
Despite an initial wave of yuan selling, the momentum started fading before midday as investors pondered further upon the central bank's move to guide the yuan only slightly weaker via its daily reference exchange rate before trading kicked off Monday.
The People's Bank of China set the dollar-yuan central parity at 6.2960 Monday, compared with 6.2879 Friday, an indication of its intention to keep the yuan basically stable, traders said.
On Saturday, the PBOC said that effective Monday, it would widen the yuan's daily trading band against the dollar to 1.0% above and below the central parity, from 0.5%. It last expanded the dollar-yuan trading band in May 2007, when it was 0.3%.
The dollar traded between CNY6.3105 and CNY6.3250 Monday, with the yuan declining as much as 0.46% from the central parity, just a whisker shy of its previous lower daily limit.
The band widening move comes as the yuan's immediate outlook seems murky and as pressures for the Chinese currency to appreciate have eased somewhat after recent data showed that China's trade has become more balanced after years of recording consistently huge trade surpluses.
Senior officials, including Premier Wen Jiabao and China's central banker, have hinted strongly in recent months that China would let the yuan trade in a wider range as they argue the currency is nearing fair value.
"Given that China's current-account surplus as a percentage of [gross domestic product] is likely to decline further this year from 2.7% in 2011... we expect the yuan may face imminent depreciation rather than appreciation pressure against the dollar in the onshore market," economists at OCBC Bank wrote in a research note.
Echoing those views, the China Securities Journal, a leading state-run financial newspaper, said in a front-page commentary Monday that the band-widening move would help the market find a more balanced exchange rate, but that China's smaller trade surplus means the currency won't continue to appreciate sharply.
"The broader currency band will better reflect demand and supply in the market and there will be less pressure from abroad to make the yuan rise," the newspaper said.
Indeed, such yuan bearishness looks much more pronounced in the smaller and less tightly controlled onshore foreign-exchange swap market as well as the unrestricted offshore yuan trading center in Hong Kong.
At 0736 GMT, the one-year benchmark dollar-yuan onshore forex swaps stood at 6.3399, up from around 6.3255 late Friday.
Offshore, the one-year dollar-yuan nondeliverable forwards have priced in even more aggressive depreciation, rising to 6.3515/6.3545 from 6.3315/6.3345 late Friday, implying a 0.6% fall by the yuan against the dollar over the next year.
In Hong Kong, where the Chinese currency trades freely, the dollar-yuan exchange rate was at 6.3115, up from 6.2983 late Friday.
The yuan has depreciated 0.3% against the dollar so far this year and accumulated a gain of 8.3% since Beijing effectively unpegged its currency from the greenback in June 2010.
Governments and multilateral lenders welcomed China's latest liberalization of yuan trade. In addition to the U.S., which urged China to further strengthen its currency, Japan greeted the move as a measure that would benefit China's economy and curb inflation pressure, while Australia called it an important step for greater flexibility.
The Asian Development Bank's chief economist, Changyong Rhee, told Dow Jones Newswires the widening is in line with China's policy to move "from export orientation to more domestic spending." And the Philippine central bank said the broader band might increase currency volatility but would promote a rebalancing of global economic growth, which would help emerging economies. The Hong Kong Monetary Authority said the move would increase market demand for tools to manage currency risks.
A Standard & Poor's analyst told Dow Jones that China's move wouldn't affect S&P's view on the country's creditworthiness, adding that the yuan remains some way from being a floating, fully convertible currency.
-By Shen Hong and Esther Fung, Dow Jones Newswires; 86-21-6120-1200; hong.shen@dowjones.com
end quote from:
http://online.wsj.com/article/BT-CO-20120416-704252.html
It is unknown why China chose right now to float their currency more than in the past. However, one point of view would be that they gain market advantage by releasing their currency out now by allowing their currency to float and letting it devalue it is easier for the world to buy their products because suddenly their currency is worth less than it was relative to other world currencies. If economic conditions change will China create a new artificial value for the Yuan? That's difficult to say but China is known for being very pragmatic and not necessarily playing by the rules that most of the rest of the world does. So only time will tell.
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