China's yuan firms as dollar dips following strong all round gains

[HONG KONG] China's yuan rose against the dollar on Friday, as the central bank set its strongest midpoint in two weeks to reflect the dollar's dip in global markets against major currencies after its recent strong advances.

The People's Bank of China set the midpoint rate at 6.1261 per dollar prior to market open, firmer than the previous fix 6.1366. It was the highest level since Jan 22.

The spot market opened at 6.2390 per dollar and was changing hands at 6.2406 near midday, 115 pips stronger than the previous close and 1.87 per cent weaker than the midpoint.

The spot rate is currently allowed to trade with a range 2 per cent above or below the official fixing on any given day.

Despite a mild rebound on Friday, the yuan is still under pressure to weaken as Beijing is expected to deliver further stimulus measures to boost yuan liquidity.

"We expect further monetary easing in the coming months,"said JP Morgan analysts in a note after the PBOC cut the reserve requirement ratio (RRR) on Wednesday.

JP Morgan expected the benchmark one-year-deposit interest rate, which was reduced to 2.75 per cent in November, to be cut by 25 basis points sometime in the first quarter, most likely in March. It also expected a second RRR cut of 50 basis points in the second quarter, supplemented by easing targeted measures like standing lending facility (SLF).

The offshore yuan was trading 0.01 per cent stronger than the onshore spot at 6.2399 per dollar.

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 6.368, or 3.80 per cent weaker than the midpoint.

One-year NDFs are settled against the midpoint, not the spot rate, and since the widening of the daily trading band to 2 percent in either direction, corporates have become wary of using the NDF to hedge due to the inherent risk.

As a result the market has lost liquidity in recent years and has frequently proven an unreliable measure of market sentiment.

REUTERS