London: China’s yuan closed slightly higher on Thursday, with traders saying weakness in Asian currencies is largely counteracting appreciation pressure from strong corporate demand.
Traders say client demand for the Chinese currency remains strong. Such reports match data released last weak showing that yuan purchases by bank clients in December exceeded dollar purchases by the largest amount in at least two years.
Despite this upward pressure, the People’s Bank of China (PBOC) has held its daily midpoint relatively stable in recent days. The spot rate has continued to trade stronger than the fix, but the two rates have moved in stable parallel in recent days.
Traders say the impact of a weakening trend in Asian currencies against the dollar - notably Japanese yen, Korean won, Taiwan dollar and the Australian dollar - has weighed on the yuan.
Amid concern about a global “currency war”, traders say Chinese authorities are loathe to allow the yuan to strengthen significantly in case its trading partners in Asian engage in competitive devaluation.
A Reuters poll showed on Thursday that wariness over further regional currency weakness had prompted currency market players to slash long positions in the yuan by about a third over the last two weeks.
The PBOC has traditionally set stronger fixings in response to a weakening in the dollar index overnight. But the trend in Asian currencies has not been reflected in the dollar index, which tracks the greenback’s value against a basket of currencies heavily weighted by the euro. The euro has strengthened in recent days amid renewed confidence about the health of European banks. Beyond the impact of the midpoint, market forces also naturally create some correlation between the yuan and other Asian currencies, traders say.