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Yuan Forwards Gain on Speculation China, U.S. Will Revive Growth

Yuan forwards advanced on speculation stimulus at home and in the U.S. will support capital inflows and exports.

People’s Bank of China Governor Zhou Xiaochuan said yesterday adjustments to interest rates and banks’ reserve requirements “can’t be ruled out” after the central bank stepped up cash injections using money-market operations. Many Federal Reserve policy makers favor a third round of asset purchases that would boost the supply of dollars unless the economy shows signs of a durable pickup, minutes of their most recent meeting showed. The U.S. is among China’s top destinations for exports.

“Investors are betting the U.S. will soon have another round of quantitative easing, supporting riskier assets,” said Patrick Cheng, a Hong Kong-based foreign-exchange analyst at Haitong International Securities Co. “I’d call for caution on the pace of easing in China and the U.S. on inflation risks.”

Twelve-month non-deliverable forwards rose 0.07 percent to 6.4412 per dollar as of 4:37 p.m. in Hong Kong, data compiled by Bloomberg show. The contracts traded at a 1.4 percent discount to the onshore spot rate. One-month implied volatility, a measure of exchange-rate swings used to price options, was unchanged at 1.25 percent.

China’s central bank conducted 145 billion yuan ($22.8 billion) of reverse-repurchase agreements today to add cash to the financial system, after injecting a record 220 billion yuan on Aug. 21. It pumped in a net 278 billion yuan this week via open-market operations, the most since January, according to Societe Generale SA. Funds were also added via an auction of 40 billion yuan of three-month treasury deposits today.

Exports Impact

The yuan retreated from a seven-week high in Shanghai after a report showed China’s manufacturing is contracting this month at the fastest pace in 2012. The Flash PMI dropped to 47.8 from 49.3, according to the preliminary findings of a survey released today by HSBC Holdings Plc and Markit Economics. Readings below 50 signal shrinkage,

“While the offshore market shows an improvement in risk appetite, the onshore spot rate remains weak on pessimism over export growth,” said Tommy Ong, a Hong Kong-based senior vice- president of treasury and markets at DBS Bank (Hong Kong) Ltd.

The currency slipped 0.03 percent to 6.3535 per dollar in the onshore market, according to the China Foreign Exchange Trade System. It touched 6.3486, the strongest since July 4. In Hong Kong, the yuan advanced 0.05 percent to 6.3548.

The central bank raised its reference rate for the yuan by 0.05 percent to a three-week high of 6.3316. The currency is allowed to trade as much as 1 percent on either side of the fixing.

China should weaken the yuan against the dollar gradually to ease pressure on exporters, according to a front-page commentary in China Securities Journal today.

To contact the reporter on this story: Fion Li in Hong Kong at fli59@bloomberg.net

To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net

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