Yuan heads for 1% rise in 2012, more volatility seen in 2013

China's yuan rose against the dollar on Monday, guided by the central bank's stronger midpoint, and looked set to end up 1 percent in 2012 after a see-saw year that saw the currency first drop then recover to hit record highs against the dollar.

The yuan was trading at 6.2295 per dollar at midday, up from Friday's close of 6.2335. If it goes on to close at the midday level, it will end up 1.03 percent for the year.

Volume dropped to $5.9 billion from a heavy $7.9 billion on Friday morning. The People's Bank of China (PBOC) strengthened its midpoint to 6.2855 from Friday's 6.2896. The exchange rate is allowed to diverge by only 1 percent in either direction from the central bank's daily midpoint.

The world's second-largest economy saw a sharp growth slowdown this year thanks to both internal and external factors, both of which influenced the yuan. The euro zone debt crisis had an outsize impact on the yuan, both by shrinking exports and pushing the dollar up in global markets. At the same time, economic restructuring limited the willingness of regulators to growth boost through infrastructure investment.

The economy is expected to begin a lacklustre recovery in 2013 as Beijing attempts to stimulate consumption to offset the impact of enduring weak demand from trading partners. This will prevent the yuan from appreciating sharply, traders said. The yuan is now up 33 percent since its landmark revaluation in mid-2005, and the government, traders and many economists now agree that the yuan exchange rate has either reached or is near fair value against the dollar.

This will encourage more of the same kind of two-way trading that characterised the market in 2012 - facilited by a decision to widen the yuan's trading band in April - instead of the one-way bet on appreciation that characterized the market up until 2011.

Overall, traders expect the yuan to appreciate or depreciate no more than 2 percent in 2013, moving mainly within a range of 6.11 to 6.36 against the dollar. They see the U.S. Federal Reserve's quantitative easing series (QE) as having a limited impact on the onshore yuan due to China's capital controls.

"The yuan trade has entered a new phase since the fourth quarter of 2011. The currency's appreciation so far, combined with China's slowing economy have dampened sentiment," said a trader at a U.S. bank in Shanghai. "Looking forward to 2013, while the central bank will seek to keep the yuan stable, the market doesn't seem to have much desire to push the exchange rate too high or low either."


The yuan had a dramatic year in 2012. Despite widespread expectations for appreciation, the currency actually depreciated in the first half of the year, and was down as much as 1.6 percent by late July. Economists said this was caused by corporates rushing to unwind overly optimistic long-yuan positions they had accumulated in 2012, aggravated by a global rush into safe-haven dollar positions.

But the situation reversed itself dramatically in the second half, with November and December seeing the market stall for weeks on end as Chinese corporates reversed course and began dumping dollars.

This saw the spot yuan hit repeated all-time highs against the dollar in November, even though it was restrained by conservative central bank midpoint settings. This resulted in the exchange rate gluing itself to the strong side of the trading band, causing trading volumes to collapse.

With this experience in mind, many traders and economists believe the central bank will widen the yuan/dollar daily trading band again in 2013.

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