China's yuan today soared to its highest against the dollar since the landmark 2005 revaluation, with the central bank stepping aside and tolerating broad gains on the first trading day since scrapping the currency's two-year peg to the dollar.
The central bank declined to intervene, one of the few times in the yuan's modern history that is has stepped aside, and appeared to want the market to drive intraday trade, backing up its weekend pledge to allow greater flexibility.
Traders said it was unlikely the yuan would repeat gains on the same scale in coming days, with Tuesday's mid-point setting serving as an important barometer of how much more appreciation the People's Bank of China (PBOC) is willing to stomach.
Several dealers said they expected the PBOC to keep the mid-point unchanged on Tuesday, or even push it up as much as 50 pips, to effectively cap how much the yuan could rise.
The yuan is allowed to rise or fall 0.5 per cent versus the dollar from the daily mid-point but rarely moves towards the extremes of that tight trading band.
The yuan closed at 6.7976 against the dollar, up 0.42 per cent from Friday's close and marking its biggest daily gain against the US currency since the revaluation set the currency free to move in a managed floating exchange rate system.
The yuan climbed as far as 6.7958 in intraday trade, another post-revaluation record and gained as much as 0.47 per cent from the central bank's mid-point, nearly reaching the 0.5 per cent daily trading band limit.
Under intense pressure to act before the Group of 20 meeting in Canada later this week, China ditched the dollar peg -- an emergency measure used to shield the economy from the global financial crisis and resulting recession.
The central bank yesterday ruled out a one-off revaluation similar to that of July 2005 and said there was no basis for any big appreciation, adding that it would keep the exchange rate at a basically stable level.
Before trade started today, the PBOC set the yuan's daily mid-point at the same level as Friday -- 6.8275 -- disappointing some offshore players who were hoping for a clear sign of appreciation.
But as the PBOC pulled back from its often heavy daily interventions, foreign and Chinese banks drove the yuan sharply higher, suggesting that the PBOC is allowing the currency to become more market-driven during the day.
A mid-point near the average of Monday's spot trades -- estimated by traders at about 6.8100 against the dollar -- would suggest the PBOC will tolerate more yuan strength heading
into a Group of 20 meeting later in the week.
Reuters