China yuan firm on higher PBOC fix, traders wary before holidays

[SHANGHAI] China's yuan edged up in early trade on Tuesday after the central bank set a higher mid-point although traders were unwilling to push the currency too high ahead of looming holidays.

The People's Bank of China set the midpoint rate at 6.6726 per US dollar prior to market open, firmer than the previous fix 6.6908, a day after it denied reports that it had relied upon foreign exchange sales by state-owned banks to stabilise the yuan.

The spot market opened at 6.6778 per US dollar and was changing hands at 6.6796 at 0224 GMT, nine pips firmer than Monday's close and 0.1 per cent weaker than the midpoint.

Two traders had told Reuters on Monday that state banks - through which the PBOC occasionally acts to influence the yuan in the foreign exchange market - sold US dollars after the Chinese central bank weakened its official fixing.

However, the PBOC said in an emailed statement that reports it had relied upon foreign exchange sales by state-owned banks to stabilise the yuan were "not factual".

Trading in Tuesday's morning session was largely subdued.

"The market does not have a strong intention to breach the 6.68 per cent level," said a trader at a foreign bank in Shanghai, noting that corporates were inclined to hold the yuan through the Mid-Autumn Festival holiday.

Chinese markets will be shut Sept 15-18.

"The market has stuck around the 6.68 level for nearly two weeks, but investors are adopting a carry-trade strategy ahead of the upcoming Mid-Autumn holiday," the trader said, noting the yuan's premium versus its offshore market levels.

In Hong Kong, the CNH Interbank Offered Rate benchmark (CNH Hibor), set by the city's Treasury Markets Association, was up sharply at 5.5155 per cent for overnight contracts on Monday, its highest level since Feb 19. Tuesday's fixing will be announced at 0315 GMT.

Offshore yuan borrowing rates have been elevated since late last week, and market players have different theories on why. Some say China's central bank pushed borrowing rates up to dampen yuan short-sellers, while others believe rates rose due to short-term liquidity concerns.

As of 0224 GMT, the offshore yuan was trading 0.15 per cent weaker from the onshore spot at 6.6894 per US dollar.

Separately on Tuesday, in a move to cushion a possible liquidity squeeze during the upcoming holiday, which may exert pressure on the yuan to deprecate, China's central bank resumed 28-day reverse bond repurchase agreements operations to pump in cash.

It was the first time since February, before the Chinese Lunar Year, that the PBOC has utilised the 28-day facility to inject cash.

Traders said a raft of economic indicators released earlier on Tuesday had a limited impact on the yuan on Tuesday.

Investment growth in China's real estate quickened slightly over January-August, suggesting investors are still confident of a booming housing market even as more local governments tighten restrictions on home purchases in a bid to keep fast-rising prices in check.

REUTERS