China May Widen Yuan Trading Band to 1% in Next Few Weeks, StanChart Says

China may widen the yuan’s trading band in the “next few weeks” as policy makers favor a more flexible exchange rate to combat inflation, according to Standard Chartered Plc.

The range may be widened to allow the currency to trade as much as 1 percent on either side of a daily fixing set by the People’s Bank of China, currency strategists Callum Henderson and Robert Minikin wrote in a research note today. It was last widened to 0.5 percent from 0.3 percent in May 2007. The yuan is allowed to swing as much as 3 percent on either side of reference rates versus the euro, yen and Hong Kong dollar.

“A wider trading band could create the conditions for modestly faster appreciation near-term to temper persistent inflation,” Henderson and Minikin wrote in the report. “Another big one-off revaluation looks unlikely, as officials have ruled this out and because the global economy is slowing.”

Government data due June 14 is expected to show inflation accelerated to 5.5 percent last month from 5.3 percent in April, according to the median forecast in a Bloomberg News survey of economists. That would be the fastest pace since July 2008. A stronger yuan helps limit price gains by making imports cheaper.

Standard Chartered reiterated a recommendation that investors buy the yuan using 12-month non-deliverable forwards, predicting an appreciation to 6.2 per dollar. The contract was little changed today at 6.3620 as of 9:13 a.m. in Hong Kong, a 1.8 percent premium to the spot rate of 6.4796 at the end of last week in Shanghai, according to data compiled by Bloomberg. Financial markets in China were closed yesterday for a holiday.

Henderson and Minikin also noted “increasing value” for shorter-dated yuan forwards. The one-month contract was little changed at 6.4780, a 0.02 percent premium to the spot rate.

The currency reached a 17-year high of 6.4777 on June 1 and the central bank set its reference rate versus the dollar at 6.4816 today, the strongest level since July 2005.

To contact the reporters on this story: David Yong in Singapore at dyong@bloomberg.net

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net

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