Yuan edges down vs dollar, but gains seen in 2011

Tuesday, 21 December 2010 00:01 - - {{hitsCtrl.values.hits}}

* Central bank may keep yuan stable in the near term

* But may let it rise in 2011 on price & political pressures

* Yuan at 6.6719, up 2.31 pct since mid-June depegging

SHANGHAI/HONGKONG, Dec 20 (Reuters) - China’s yuan fell on Monday as the People’s Bank of China set a lower mid-point in the wake of a rise in the U.S. dollar index.

But the PBOC’s fixing changed so little that traders said it clearly indicated the central bank wants to keep the yuan stable in the near term, traders said.

The premium enjoyed by offshore yuan in Hong Kong against onshore yuan was steady at 60 pips by midday from 50 pips at Friday’s close.

But the spread has narrowed from a peak of 1,790 pips hit in mid-October, as the offshore market meshed its view with the onshore market -- that the yuan would remain stable in the near term.

“We are focused on the dollar index performance for now,” said a dealer at an European bank in Shanghai. “And the little changed fixing gives us a signal that the central bank has no intention to let the yuan move too much.”

But with price pressures showing no signs of subsiding and a slew of political events next year starting with President Hu’s visit to the U.S. in January, the yuan’s rise may accelerate, analysts say.

“It may be preferable to incur a marginal decline in its (China’s trade) surplus as a result of faster currency gains than risk a major drop in exports if the U.S. initiates stronger action,” Credit Agricole strategists say.

Spot yuan was trading at 6.6719 versus the dollar by midday, falling from Friday’s close of 6.6555. It has risen 2.31 percent since the PBOC announced a depegging in mid-June.

Before trade began, the PBOC set the day’s mid-point at 6.6623, which was slightly weaker than Friday’s 6.6593. The mid-point is a level from which the yuan may rise or fall 0.5 percent against the dollar on a given day.

Offshore, one-year NDFs were bid at 6.5370, up slightly from Friday’s close of 6.5280. Their implied yuan appreciation in a year’s time fell to 1.92 percent from 2.06 percent.