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Monday, July 5, 2010

China Yuan Down Big , After Hitting Modern-Era Intraday

China's yuan fell sharply against the U.S. dollar late Monday afternoon after the Chinese currency hit a modern-era high earlier in the session, amid the dollar's rebound in offshore markets and signs of intervention from the Chinese central bank.

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On the over-the-counter market, the dollar was at CNY6.7758 around 0930 GMT, up from CNY6.7711 Friday, which was the yuan's highest settlement level against the dollar since the 1980s, before the currency was allowed to be regularly traded as part of China's market-oriented reforms.

The yuan had a strong start Monday and in mid-afternoon trade hit CNY6.7676 against the dollar, the Chinese currency's highest intraday level in the modern era.

However, a wave of selling in the last trading hour dragged the yuan down to an intraday low of CNY6.7766 to the dollar, amid signs of strong dollar buying by the People's Bank of China via the automatic price-matching system.

"I think the central bank is sending a signal that it doesn't want the yuan to appreciate further in the near term," said a Shanghai-based foreign bank trader.

The price-matching system is a little-used anonymous trading platform that dealers believe the PBOC uses on occasion to signal its intentions to the market, while not officially showing its hand.

"The central bank has expressed its intention through today's higher dollar-yuan central parity but the market continued to buy the yuan earlier today as we wanted to know how much the central bank would let the yuan rise," the trader said.

The PBOC set the session's dollar-yuan central parity rate moderately higher at 6.7733 from Friday's record low of 6.7720, even though the dollar continued to weaken against the euro Friday.

"The higher central parity rate today may be signaling the central bank doesn't want the yuan to rise too quickly given the gains last week," said a Shanghai-based trader at a local bank.

The yuan has appreciated 0.74% against the dollar since the central bank announced on June 19 a decision to drop its nearly two-year-old currency peg to the dollar and promised to make the yuan exchange rate more flexible.

The dollar's slight rebound against the euro and yen also capped further gains in the yuan, traders said.

The euro was at $1.2530 at 1022 GMT, down from $1.2543 in late New York trade Friday.

Traders said room for any future yuan appreciation may not be large, as shown by lackluster trading in the offshore dollar-yuan nondeliverable forwards market of late. Mad Money w/ Jim Cramer T-Shirt

"The offshore NDF market shows foreign investors don't believe there's room for large yuan appreciation in the near term," said another Shanghai-based trader at a local bank.
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