CHINA’S yuan crossed the central bank’s daily midpoint for the first time since March yesterday, as traders pushed the yuan back toward bullish territory after a weak first half, potentially preparing the ground for robust gains in the second.

    The move also marks the first time since September 2012 that the spot rate has crossed the midpoint to the strong side of the central bank’s guidance rate. In 2012, that set off a long-running rally that lasted into early 2014.

    The yuan’s smart gains since late May come in the face of signals from the People’s Bank of China that it wants to keep the currency stable for now.

    At the same time, the newly-widened trading band — increased to 2 percent from 1 percent in March — has given the market increased latitude to price the currency as it sees fit. That has introduced more risk into the market but also reduced the traction the midpoint fix has over pricing.

    “The spot rate converging with the midpoint is consistent with the meaning of ‘bi-directional volatility,’” said a trader at a European bank in Shanghai, referring to the stated reason for widening the trading band given by regulators.

    “However, this doesn’t mean the resumption of one-way appreciation, or that market participants have changed their expectations regarding the yuan’s future trend. It just represents the end of the sharp depreciation experienced earlier this year.”

    The yuan’s recent rally, supported by signs of recovery in exports, has wiped out part of the 3.3 percent of losses incurred at the depth of its weakness in late April. That was when the central bank punished speculators by engineering a dramatic and sustained decline in the exchange rate.

    At that point, the spot rate was trading at a record 1.7 percent weaker than the official guidance rate.

    The yuan’s slide not only discouraged hot money inflows and caused short-term speculators to bail out of leveraged long-yuan positions, but also generated losses at Chinese companies such as airlines, which had bet heavily on further appreciation. It also garnered criticism from the U.S. Government, which has consistently complained that China keeps the yuan undervalued.

    A research report by China-focused investment bank NSBO in Beijing said the government’s attempts to drive out speculation had caused many investment funds targeting China to “park” funds temporarily in the United States. The process is now reversing on signs China’s manufacturing and exports are recovering, and seen providing deeper support to the yuan’s rally.

    “We expect moderate appreciation of the yuan overall in the second half, mainly due to the market rate shifting above the central bank set rate rather than any significant move by the central bank,” authors of the NSBO report wrote.

    “The central bank may, instead, have to intervene more aggressively again to keep up the threat of greater volatility to deter another round of speculative inflows.”

    The yuan’s previous underperformance stands out starkly if seen through the lens of the Sharpe ratio, which takes into account percentage returns of the currency minus risk-free rate returns adjusted for currency standard deviation or swings.

    Using that metric, the Chinese currency has notched up a ratio of minus 2.2, the worst six-month performance since the second half of 2010. In comparison, on a Sharpe-ratio basis, the yuan posted a rate of return of 2.8 in the corresponding period of last year.

    (SD-Agencies)