SHANGHAI (Reuters) - The yuan ended slightly down against the dollar in April, despite official midpoint settings which hit historic highs on Thursday and Friday.
The yuan also tested its recently widened trading band for the first time on Friday, but overall day-to-day volatility has moderated since the policy came into effect.
The central bank set the midpoint at 6.2787 on Friday, an historic high after another record-high fixing the previous day, but spot yuan prices did not accompany the midpoint upward.
The currency started the day trading below the midpoint, as it has since mid-March, and weakened steadily all morning, hitting an intra-day weak point of 6.3124, or 0.54 percent off of the fixing, in mid-afternoon, marking the first time the yuan crossed its previous range limit to trade more than 0.5 percent away from the fix.
It then rebounded slightly to close at 6.3102, down 122 pips from the end of March.
Chinese regulators widened the yuan’s controlled trading band on April 16, allowing the dollar-yuan exchange rate to move 1.0 percent in either direction away from the official midpoint on any given day. The last band widening was in May 2007, when it was increased to 0.5 percent from 0.3 percent.
Widening the band is a step towards greater flexibility in yuan trading and the overall liberalization of China’s capital accounts. It also reduces the amount of intervention the State Administration of Foreign Exchange (SAFE) is required to conduct to keep the yuan within its designated intra-day trading range.
“By that measure the policy has already achieved a certain measure of success,” said Dariusz Kowalczyk, economist at Credit Agricole CIB. “SAFE wanted to reduce interventions in the market. Had they not widened the band, they would have been forced to intervene today.”
But he added that the increased usage of the band was not a result of volatility in the spot rate. The yuan’s daily movements have remained within a narrow range of approximately 50 pips since the new policy came into effect, compared with a range between 100 and 200 pips in the six weeks prior to the widening. The daily weighted moving average flattened in April, ending only 37 pips away from its March closing at 6.3068 per dollar.
Traders have remained consistently wary of the central bank’s more aggressive midpoint settings. Several market players said they believed the recent record-high midpoint settings were political gestures toward Washington prior to the U.S.-China Strategic and Economic Dialogue to be held next week.
“We couldn’t do any business with (today’s) midpoint,” said a trader at a Shanghai bank.
Other market players that spoke to Reuters during the month repeatedly said they believe a price around 6.3 represents a temporary equilibrium for the yuan, pending fresh developments.
However, a trader at a foreign bank in Shanghai said the current price primarily represents the conservative attitude of the largest state-owned banks.
“Trading here is dominated by the big four state-owned banks. You can’t expect other institutions to have the resources to quote far away from these banks’ quotations to fight with them,” he said.
Additional reporting by Jianxin Lu