Mighty RMB! Nearly Hits +0.5% Limit on Monday

Following up on a prior post, there isn't much to explain here other than say that the Chinese monetary authorities seem to have lived up to their word in not interfering with the upward momentum of the yuan. At the close of Monday's trading, it nearly hit the limit of the plus or minus 0.5% band (on the upside, obviously). While not interfering with trading, the daily fixing for Tuesday is set to be made at the mid-point of trading, not the limit, to delay the upward climb somewhat:

China's yuan soared on Monday to its highest against the dollar since the landmark 2005 revaluation, with the central bank stepping aside and tolerating broad gains on the first trading day since scrapping the currency's two-year peg to the dollar. The central bank declined to intervene for the of the few times in the yuan's modern history and appeared to want the market to drive intraday trade, backing up its weekend pledge to allow greater flexibility.

Traders said it was unlikely the yuan would repeat gains on the same scale in coming days, with Tuesday's mid-point setting serving as an important barometer of how much more appreciation the People's Bank of China is willing to stomach. "You cannot expect the yuan to shoot up 5 percent in two or three weeks, as the pace of Monday's rise implies," said a dealer at a North American bank in Shanghai.

Several dealers said they expected the PBOC to keep the mid-point unchanged on Tuesday, or even push it up as much as 50 pips, to effectively cap how much the yuan could rise. The yuan is allowed to rise or fall 0.5 percent versus the dollar from the daily mid-point but rarely moved towards the extremes of that tight trading band.

The yuan closed at 6.7976 against the dollar, up 0.42 percent from Friday's close and marking its biggest daily gain against the U.S. currency since the revaluation set the currency free to move in a managed floating exchange rate system. The yuan climbed as far as 6.7958 in intraday trade, another post-revaluation record and gaining as much as 0.47 percent from the central bank's mid-point, nearly reaching the 0.5 percent daily trading band limit.

These are fascinating developments. Whether the next few days will see moves of similar magnitude (approaching +0.5%) is certainly something to watch.