China's yuan ends firmer on suspected intervention, stock rally

By Lu Jianxin and Pete Sweeney

SHANGHAI (Reuters) - China's yuan closed firmer against the dollar on Thursday as traders cited large transactions by state-owned banks possibly on behalf of the central bank, which supported the Chinese currency in both spot and derivative markets.

"Major state banks did some large deals, supporting the yuan's value," said a dealer at a European bank in Shanghai.

"While we cannot be 100 percent sure, such large transactions are typically conducted on behalf of the central bank."

The spot market opened at 6.4155 per dollar but reversed its earlier losses to close at 6.4053, 0.08 percent stronger than the previous close of 6.4105.

Onshore one-year yuan/dollar deliverable forwards were quoted at 6.5208 late on Thursday from Wednesday's close of 6.5790.

"Large state-owned banks were seen trading one-year forwards, pushing down the implied discount of the yuan's value in 12 months against its value now," a trader at a Chinese commercial bank in Shanghai said.

"Other tenors followed the direction of the one-year contract," he said. "The move appears to dampen expectations of yuan depreciation in the future."

Beijing appears to have been so surprised by the global reaction to its abrupt currency devaluation in mid-August that it is likely to keep the yuan on a tight leash in the near-term to head off a currency war that could spark a broader financial crisis, policy insiders say.

The central bank has stepped up intervention in yuan trading, ordering state banks to buy yuan at designated rates on behalf of the monetary authorities, among other emergency measures, banking sources have told Reuters.

Traders said another reason for the yuan's rebound on Thursday was a recovery in the country's major stock indexes, which boosted sentiment on the currency.

The benchmark Shanghai Composite Index closed up 5.3 percent partly as a strong rebound on Wall Street helped calm global markets after days of wild volatility. [.SS]

"More money flows into the currency market after a slew of easing policies have also boosted sentiment in the stock market," said a trader at a foreign bank in Shanghai.

Despite the yuan's rise on Thursday, many traders said they believed the currency was still facing downward pressure amid a sharp slowdown of the world's second-largest economy.

As a sign of such expectations, offshore yuan was trading 1.1 percent weaker than the onshore spot at 6.4761 per dollar in late trading on Thursday.

Offshore one-year non-deliverable forwards contracts, considered the best available proxy for forward-looking market expectations of the yuan's value, traded at 6.6475, or 3.6 percent weaker than Thursday's midpoint.

GRAPHICS:

The yuan in trade-weighted terms http://link.reuters.com/sed74t

The spot market versus the trading band http://reut.rs/1MhsqOi

(Editing by Jacqueline Wong)