The yuan ended almost unchanged against the dollar on Wednesday, drifting away from its daily upper limit in late trade after the People's Bank of China (PBOC) appeared to inject liquidity into the market.
The market has been deadlocked for weeks with the central bank unwilling to help clear a dollar overhang by buying up the U.S. currency or allowing the yuan to appreciate, although it has stepped in at times when yuan liquidity becomes especially tight.
"Major banks bought dollars in the last few minutes," said a dealer at a major Chinese commercial bank in Shanghai. "You can't be 100 percent sure it's a PBOC liquidity injection, but such purchases are typically from large banks on behalf of the central bank."
Spot yuan closed at 6.2253 per dollar, after spending virtually the whole day at its top-end limit of 6.2242. That compared with Tuesday's close of 6.2256.
The scale of the yuan's advance was scripted by the PBOC, which set the yuan's daily midpoint at 6.2871, or 14 pips stronger than Tuesday's midpoint.
Volume jumped to $10.34 billion on Wednesday, up from Tuesday's $2.59 billion, although that was still short of the average full-day trading volume of $13.9 billion in the first nine months of this year. About one-fourth of the day's total trading volume occurred in the last 30 minutes of trading.
Traders expect low trading volumes to prevail until early next year, with the central bank leaving it to the market to whittle down the overhang of dollars from positions built up in the first half of the year, when the yuan was weakening.
Traders say the market is hoping that the central bank will act to break the recent deadlock, which has left the yuan clinging to its upper trading limit for 27 of the last 30 sessions.
That could occur either by adjusting the daily trading range to let the yuan strengthen further, or by buying large amounts of dollars. So far the PBOC has only appeared to buy dollars when the market's lack of liquidity has become pronounced.
Still, the PBOC may let the yuan strengthen slightly this month, traders said.
In recent years, the central bank has guided the currency higher in the last few weeks of a year — possibly to meet pre-determined annual appreciation targets and to deflect U.S. criticism that the Chinese currency is undervalued.
Traders say the yuan could appreciate to around 6.2 by the end of this year, but even so, few companies are expected to attempt to build large yuan positions in coming weeks due to the lack of yuan liquidity in the market.
But many traders expect the central bank to shift its strategy next year to help resolve the deadlock, mostly likely by injecting yuan liquidity.
The yuan has gained 1.1 percent against the dollar for the year so far, after rallying 2.8 percent from its late July low.
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