July 24, 2012 / 10:29 AM / in 5 years

China PMI supports yuan, euro still a drag

SHANGHAI (Reuters) - China’s yuan touched a near 10-month low on Tuesday morning as it extended its link to the ailing euro, but perked up midday following better-than-expected factory output data.

The central bank set its daily midpoint at 6.3339 per dollar on Tuesday, its weakest level in 2012, after the euro hit another two-year low on Monday.

The yuan touched 6.3930 in the first hour of trade, 66 pips weaker than Monday’s close and the weakest level since late September 2011.

But the market was buoyed later in the morning by the release of a survey showing that China’s manufacturing output grew at its fastest pace in nine months.

The yuan closed at 6.3858 per dollar, 8 pips stronger than Monday’s close.

The HSBC Flash China manufacturing purchasing managers index (PMI) rose to 49.5 in July from 48.2 in June, putting it close to the 50 level that divides expansion from contraction. The increase was driven by a jump in the output sub-index to 51.2 -- the best showing since October 2011.

Bargain hunting was also a likely factor in the yuan’s late morning bounce.

“Some companies saw the rate rise above 6.39 and decided to jump in,” said a trader at a European bank in Shanghai.

China’s currency has closely tracked the euro in recent months, but with the yuan having now fallen 1.4 percent versus the dollar this year, traders are divided about how much more depreciation the central bank will tolerate.

While some believe the central bank will not let the yuan decline much beyond 6.40-42, others point out that the yuan has actually not fallen much when measured against a broader basket of currencies.

“You can’t just look at the dollar. If you only look at the dollar, the yuan has appreciated fiercely. But if you look at the euro, it’s quite ok,” said a trader at a joint-stock bank in Shanghai.

Indeed, the yuan has fallen only 0.5 percent versus the euro this year.

The yuan has traded weaker than the central bank’s midpoint nearly every day since mid-March, with traders periodically detecting signs of intervention by the central bank to prop up the currency’s value.

The recent trend is a sharp reversal from the one established since China’s landmark de-pegging of its currency in 2005. For most of the period since then, spot yuan traded stronger than the fix, while the central bank injected yuan into the market to weaken the exchange rate.

As expectations of one-way yuan appreciation have diminished and the dollar strengthens in global markets, many Chinese exporters that once exchanged almost all their dollar receipts for yuan are now keeping dollars on hand, traders say.

The decline in dollar-selling is leading to a relative shortage in the interbank market.

“Right now there aren’t a lot of dollars in the market, but the demand is still quite robust,” said the city commercial bank trader.

Offshore, one-year non-deliverable forwards traded at 6.4245 in late afternoon, implying 0.6 percent depreciation over the next 12 months, little changed from Monday.

Editing by Richard Borsuk

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