2011-12-08

Yuan limit down for seventh straight day

A confusing headline for the story: Yuan up vs dollar, hits limit down for 7th day
Spot yuan was at 6.3586 per dollar by midday, higher than Wednesday's close of 6.3643, but hit limit down at 6.3636.
So was the yuan up or down? Hard to say because the currency doesn't float, the price is set by the PBOC:
Before trading began, the PBOC fixed the day's mid-point at 6.3319, stronger than Wednesday's 6.3342. The central bank uses the fixing to express the government's intention for the yuan's daily movement.
As was covered in yesterday's post on the falling yuan, the PBOC is setting the midpoint price too high each day. The limit down is 0.5%, which is equivalent to about 3 cents. However, on the next day, the midpoint price is only moving about 0.04%. Thus, banks are just continually selling into an overpriced market. Right now, the yuan is overvalued in the market and banks are draining undervalued foreign currency from of the system.

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