China’s yuan hits record high as Oct holiday approaches

by on September 28, 2012 8:19 am BST

Fri Sep 28, 2012 4:19am EDT

* Rises on strong corporate demand for yuan

* Banks avoid carrying long positions over holiday

By Gabriel Wildau

SHANGHAI, Sept 28 (Reuters) – China’s yuan rose on Friday to
its strongest level on record, as traders reported strong
corporate demand for yuan and banks moved to avoid carrying
short yuan positions over the upcoming week-long holiday.

At its strongest point, the yuan was 0.9 percent firmer than
the central bank’s midpoint, the widest strong-side distance
from the fix since the trading band was widened to 1 percent
from 0.5 percent in April.

“Today the important factor has been customer demand,
because accumulated foreign exchange settlement was relatively
high. There was no demand for dollars, so the market (for
dollars) plunged,” said a dealer at a city commercial bank in

Another source of upward pressure on the yuan this week has
been banks’ desire to avoid carrying short yuan positions
through the week-long holiday that kicks off with the Mid-Autumn
Festival this weekend.

Carrying such a position would be expensive because it would
require borrowing yuan in the forex swap market. Such swaps are
currently expensive due to tight yuan liquidity in the domestic
money market.

The cost of carry would also be heightened by the length of
the holiday as the swap would be needed for a longer duration.

Spot yuan hit 6.2856 per dollar shortly after 3
pm (0700 GMT), 169 pips stronger than Thursday’s close and 84
pips above its midday level of around 6.2940. The previous
all-time high of 6.2884 occurred in February.

The yuan has strengthened consistently since hitting a 2012
intraday low of 6.3967 on July 25, supported by the dollar’s
retreat in global markets and, more recently, the launch of the
Federal Reserve’s latest round of quantitative easing. At that
level, the yuan was down 1.6 percent for the year.

The currency is set to post its biggest monthly gain of the
year in September.