Yuan touches record trading high against dollar

SHANGHAI, Nov 9 (Reuters): The yuan touched a record trading high against the dollar Wednesday, playing catch-up with the Chinese central bank's mid-point, but the currency closed off the high amid caution over its potential to appreciate in the future, traders said. The People's Bank of China (PBoC) fixed the mid-point, or its reference rate at which dollaryuan can rise or fall 0.5 per cent from that level in a day, slightly higher but short of the fixing's record high. The central bank has been guiding the yuan steadily upwards since the start of this year, partly to help fight China's high inflation, but it has slowed the pace of yuan appreciation since September amid growing global market turmoil, caused mainly by the euro zone debt crisis. However, by setting a slew of strong fixings recently, the PBoC has also sent a clear signal that the government will not let the yuan depreciate any time soon, traders said. "The yuan appears to continue to appreciate in the near term, but the potential may be quite limited," said a trader at a Chinese commercial bank in Shenzhen. Many traders now expect the yuan to rise to around 6.30 versus the dollar by the end of this year, meaning the currency could appreciate 4.6 per cent for 2011 but less than the 5 to 6 percent appreciation the market expected early this year. Spot yuan closed at 6.3402 versus the dollar, up from 6.3462 at Tuesday's close. It touched an all-time trading peak of 6.3365 in early trade, toppling its historical high of 6.3370 set last Friday. Before trading began, the PBoC set the mid-point at 6.3207, slightly stronger than Tuesday's 6.3247 but short of the fixing's record high of 6.3165 also set last Friday. It uses the fixing to signal the government's intentions for the yuan. Spot yuan has now risen 3.94 per cent so far this year and 7.67 per cent since it was depegged from the dollar in June 2010, but it has lagged the PBoC's mid-point recently due in part to the spread between Shanghai and Hong Kong, which encourages Chinese firms who need dollars to buy them more cheaply at home. As spot yuan plays catch-up with the PBoC's fixings, the negative spread between spot yuan in Shanghai and Hong Kong dwindled to 183 pips from 223 pips at Tuesday's close. The spread hit a record high of 1,311 pips on September 23 when a rally in the dollar in global markets sparked dollar short-covering in offshore markets, reaching a level wide enough for firms to conduct some arbitrage against the onshore market. Some overseas investors appear to have also been shorting the yuan in recent weeks amid signs that China's economic growth is slowing under the double weight of a global slowdown and the country's monetary tightening policies in place since October last year to manage high inflation. But China's annual inflation rate fell sharply in October to 5.5 per cent in a further pullback from July's three-year peak, giving Beijing more room to fine-tune policy, including slowing the yuan's appreciation, to help an economy feeling the chill of a global slowdown. But the government is still under heavy pressure from abroad, in particular from the United States, to let its currency appreciate to help balance trade. The head of the International Monetary Fund (IMF), Christine Lagarde, speaking at a forum in Beijing, said that China needed to shift its growth model from being export-led to a more balanced one and that the country also needed a stronger currency. Offshore, one-year dollaryuan non-deliverable forwards (NDFs) were bid at 6.3085, down from 6.3310 at the close Tuesday. They now implied yuan appreciation of 0.19 per cent in 12 months from Wednesday's PBOC mid-point, reversing an implied depreciation of 0.16 per cent at Tuesday's close. Offshore dollaryuan forwards typically forecast yuan appreciation over the past few years but in a rare case, it has implied yuan depreciation for most of the time since September's dollar rally in global markets.