Yuan ends lower after U.S. delays currency report

By Lu Jianxin and Jacqueline Wong

SHANGHAI (BestGrowthStock) – Spot yuan on Monday pulled back from its highest versus the dollar since its landmark revaluation in July 2005 after the U.S. Treasury Department delayed a report on trade partners’ currency practices.

The People’s Bank of China fixed a weaker mid-point after the Obama administration decided to delay the decision on Friday on whether it believes China manipulates its currency to create an unfair trade advantage that could sour ties between the world’s two biggest economies.

State media reported that Chinese Vice Premier Wang Qishan spoke to U.S. Treasury Secretary Timothy Geithner by telephone after the delay, a sign the U.S. administration may be happy with the yuan’s 2-plus percent jump since early September, dealers said. That pace of appreciation is the quickest since the 2005 revaluation.

With U.S. pressure being temporarily relieved, the Chinese currency is likely to move narrowly around 6.6500 per dollar before late October ahead of the U.S. Congressional elections in early November and G20 summit in Seoul in mid-November.

Many dealers see the yuan rising to about 6.6000 up to mid-November in this leg of appreciation, representing a 3.4 percent gain since the depegging, but the yuan’s rise afterwards will then pause if the dollar stabilizes in global markets.

“The Chinese and U.S. administrations appear to have reached some sort of understanding for the yuan to appreciate to a certain degree to defuse tensions on this issue,” said a senior dealer in an Asian bank in Shanghai.

“There must be a limit to how much China will let the yuan appreciate as China cannot only make concessions to the United States without also making some effort to quell domestic complaints, in particular from small exporters whose profit margins are only a few percentage points.”

THREE PERCENT

Ministry of Commerce spokesman Yao Jian on Friday urged the United States not to make the yuan a scapegoat for its own domestic problems while hinting about maximum concessions the Chinese government was prepared to make in the short term.

“If the yuan’s exchange rate rises by 3 percent, it will put great pressure on some Chinese exporters,” Yao told reporters at the sideline of a media briefing in Beijing ahead of the U.S. announcement of a delay in the currency report.

The yuan closed at 6.6441 against the dollar, down from Friday’s close of 6.6412 and its intraday post-revaluation high of 6.6404 hit on Friday.

Before trading started, the PBOC fixed the mid-point, or its reference rate from which the yuan can rise or fall 0.5 percent in a day, at 6.6541, weaker than Friday’s record high of 6.6497.

The yuan has appreciated 2.74 percent since the PBOC announced its depegging to the dollar on June 19, although its rise has still lagged far behind a more than 10 percent plunge in the U.S. dollar index (Read more about the global trade. ) (.DXY: ) during the same period.

Dollar/yuan non-deliverable forwards (NDFs) rose from lows to imply less yuan appreciation after the PBOC fixed a weaker mid-point. Dealers are warning of increasing risks in further pushing NDFs lower.

Three-month dollar/yuan NDFs were bid at 6.5500 in late trade, up from a record low of 6.5250 hit earlier in the day, with their implied yuan appreciation falling to 1.59 percent in the next three months from 1.98 percent.

Yuan ends lower after U.S. delays currency report