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China's yuan rises but strong dollar caps gains
[HONG KONG] China's yuan edged higher against the dollar on Friday after the central bank fixed the daily midpoint slightly stronger, though data showing soft inflation pressures kept gains in check.
China's annual consumer inflation hovered at a near five-year low of 1.5 per cent in December, signalling persistent weakness in the economy but giving policymakers more room to ease policy to support growth.
The People's Bank of China set the midpoint rate at 6.1296 per dollar prior to market open, firmer than the previous fix 6.1302.
Spot yuan opened at 6.2110 per dollar and was changing hands at 6.2065 in late morning trade, 1.25 per cent away from the midpoint. The spot rate is allowed to trade with a range 2 per cent above or below the official fixing on any given day.
However, market participants were reluctant to chase the yuan higher against the dollar before US jobs data that could cement the case for a rate hike by the Federal Reserve.
Some strategists such as Barclays Capital expect that "a desire for yuan stability may still be consistent with a gradual, but limited currency depreciation." The offshore yuan was trading -0.05 per cent away from the onshore spot at 6.2096 per dollar.
Offshore one-year non-deliverage forwards contracts (NDFs), considered the best available proxy for forward-looking market expectations of the yuan's value, traded at 6.316, -2.95 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 warier of using the NDF to hedge given the basis risk inherent in them.