[ HONG KONG] China's yuan held steady against the dollar on Friday after suspected intervention by the central bank to get the volatile market to settle into a range and to curb expectations that the currency will fall into a depreciation cycle.
The People's Bank of China set the yuan's midpoint rate at 6.3975 per dollar prior to market open, firmer than the previous fix at 6.401.
The spot market opened at 6.3990 per dollar and was changing hands at 6.3995 at midday, 5 pips away from the previous close and 0.03 per cent away from the midpoint.
The spot rate is currently allowed to trade within a range 2 per cent above or below the official fixing on any given day.
The yuan fell for three consecutive days and had repeatedly touched fresh four-year lows since Tuesday, when the People's Bank of China (PBOC) surprised the market by devaluing the yuan by nearly 2 per cent.
"Major state banks are suspected of buying yuan whenever it nears 6.4 per dollar. This level appears to be where the PBOC wants to keep the yuan stable for today, possibly in the near term," said a trader at a foreign bank in Shanghai.
PBOC Governor Yi Gang said on Thursday that the central bank had already withdrawn from regular intervention but would implement effective management of the exchange rate in case of extreme currency volatility.
Offshore yuan was trading at 6.4325 per dollar, 0.51 per cent away from the onshore spot rate.
Offshore one-year non-deliverable forwards contracts (NDFs), considered the best available proxy for forward-looking market expectations of the yuan's value, traded at 6.5425, or 2.22 per cent away from the midpoint.
One-year NDFs are settled against the midpoint, not the spot rate, and now that the trading band has been widened to 2 per cent in either direction, corporates are much more wary of using NDFs to hedge, given the basis risk inherent in them.
As a result, the market has lost liquidity in recent years and has frequently proven an unreliable measure of market sentiment.