Spot yuan closed at its limit-up of 6.2301 per dollar after opening at that level and mostly staying there through the end, leaving it slightly weaker than Thursday's close of 6.2282. The People's Bank of China (PBOC) ensured its currency fell by setting the yuan's daily midpoint at 6.2930 versus the dollar, the yuan's weakest fix since November 19. The PBOC permits the exchange rate to rise or fall by no more than 1 percent from the midpoint it sets each morning. Under China's tight control onshore currency market, transactions on behalf of clients need to be backed by documents proving trade or other approved economic activity in order to curb speculation.
"Firms now try to sell their surplus dollars in short-term forwards market, causing spot trading to be all but completely deadlocked," said a trader at a Chinese commercial bank in Shanghai. "While the market and the PBOC continue to quote the yuan at different levels, the gap between their quotes is actually not that big," the trader said. One-day yuan/dollar forwards traded at 6.2150 late in the session. That suggests the spot market prefers to buy and sell yuan only about 151 pips firmer than the official spot rate, though overnight interest rates also play a role in forward pricing.
China's spot yuan deals are settled two days later, known as T+2, so overnight forwards are settled three days later. While trading volume in forwards is not available, spot trade volume fell to only $2.71 billion in the spot market on Friday, even less than the meagre $2.94 billion traded on Thursday. The market's average full-day volume was $13.9 billion in the first nine months of this year. The yuan now stands 1.0 percent up versus the dollar for the year so far, having rallied 2.7 percent from its low for the year in late July. Traders expect low trading volumes in the spot market to prevail until the end of this year or early 2013, with the PBOC leaving it to the market to whittle down an overhang of dollars.