China's yuan firms, state banks seen smoothening volatility

[SHANGHAI] China's yuan firmed against the dollar on Thursday, after the central bank set a stronger guidance rate and traders suspected state-owned banks intervened to hold down volatility.

The People's Bank of China set the midpoint rate at 6.4707 per dollar prior to market open, 0.07 per cent firmer than the previous fix of 6.4754.

In the spot market, the yuan opened at 6.4727 per dollar and was changing hands at 6.4714 by midday in range-bound trade, strengthening 0.16 per cent from the previous late session close.

Traders believed strong demand for dollars was in part tempered by the presence of state-owned banks.

"There was strong dollar demand in early morning trade,"said a trader at a Chinese commercial bank in Shanghai. "But state banks were offering prices around 6.4760, which limited movement in the spot rate." Traders said the yuan still faces long-term depreciation pressure against the dollar given varying economic fundamentals in the United States and China, but the Chinese currency's short-term volatility will hinge on how the dollar index moves.

The dollar index, which tracks the greenback against a basket of major currencies, stood at 94.434 around midday on Thursday in Asian trade, after plumbing to 94.239 in the previous session, its lowest since October last year.

Minutes from the Fed's March 15-16 policy meeting suggested that the central bank appears unlikely to raise interest rates before June due to widespread concern among policymakers over their limited ability to counter the blow of a global economic slowdown.

On Wednesday, a Reuters poll showed that China's foreign exchange reserves - the world's largest - likely fell for a fifth straight month in March, easing to US$3.18 trillion from US$3.2 trillion in February. The data may be released on Thursday.

The offshore yuan was trading 0.18 per cent softer than the onshore spot at 6.4829 per dollar.

REUTERS