The yuan CNY=CFXS weakened against the dollar on Monday and traded below the People's Bank of China's mid-point as banks and their clients were cautiously balancing dollar positions in anticipation of only limited yuan appreciation after the G20 summit.
The PBOC set the daily mid-point CNY=SAEC at 6.7890 to the dollar before trading started, its highest since the yuan's July 2005 revaluation but just barely firmer than Friday's 6.7896, after a G20 communique bowed to Beijing sensitivities and dropped draft language praising China's exchange rate flexibility.
Monday's higher mid-point was believed to be a goodwill gesture from China following the G20 summit, dealers said.
But because it remained near the yuan's trading close of 6.7900 on Friday, it also delivered a message to the market that the Chinese central bank did not want the Chinese currency to appreciate too far or too fast, they said.
The market clearly got the message, with dealers reporting that wary trading made it unnecessary for the PBOC to use state banks to intervene indirectly to cap the yuan's movements.
We see no bids for large-scale deals from major banks that could imply indirect central bank intervention, said a European bank dealer in Shanghai.
Banks and their clients are also trading cautiously to avoid selling too many dollars and suffering from another shortage.
Some banks and their clients who sold dollars early last week, after the PBOC's June 19 announcement that depegged the yuan from the dollar, were quickly hit by a dollar shortfall and forced to buy back the currency, helping to pull the yuan back from its post-revaluation highs.
Chinese rules ban banks from holding short positions overnight.
On Monday, the yuan was quoted at 6.7933 against the dollar at midday, down from Friday's close of 6.7900.
Its trading range narrowed to 51 pips -- from 6.7909 to 6.7960 -- compared with a daily average of more than 200 pips last week, signalling that activity had grown cautious, traders said.
The yuan CNY=CFXS on Friday marked its highest close since the July 2005 revaluation, while posting a 0.5 percent rise for the first week after depegging, ahead of the G20 summit.
But no one in the market believes China would let the yuan appreciate at an annualised pace of more than 20 percent as it did last week.
During the G20 summit, China did not want the precedent of having its currency singled out, even in a positive light, in a formal statement by the G20, although its victory on the issue was not total.
If cautious officials in Beijing had not had the G20 to worry about, the Chinese currency might still be locked to the dollar. The threat of intense, coordinated criticism may have been crucial in pushing the government to depeg the yuan last week.
Many dealers expect two-way volatility in spot yuan trading to remain after the Chinese currency policy reform, but they are quick to add that the yuan's appreciation will not likely be enough to satisfy U.S. lawmakers and other critics who want the yuan to rise as much as 40 percent.
Despite caution about Beijing's stance, dealers recommended selling short in the middle of the curve in dollar/yuan offshore forwards, particularly the benchmark one-year contract.
Dollar/yuan one-year non-deliverable forwards (NDFs) edged lower to 6.6700 bid from Friday's close of 6.6740, with implied yuan appreciation over that period rising slightly to 1.78 percent from 1.73 percent. (Editing by Edmund Klamann)