Yuan Gains on Strongest December Fixing, U.S. Budget Optimism

The yuan gained as the central bank set the currency’s fixing at the strongest level this month amid optimism U.S. lawmakers will reach a budget deal to avert tax increases and spending cuts in China’s biggest export market.

The People’s Bank of China raised the reference rate by 0.02 percent to 6.2865 per dollar, the highest since Nov. 27. The yuan is allowed to trade as much as 1 percent on either side of the fixing. The MSCI Asia Pacific Index (MXAP) of stocks reached a nine-month high after U.S. House Speaker John Boehner said there would be a vote this week on a plan to raise taxes on income of more than $1 million a year.

“Risk appetite has improved as it’s likely that the U.S. budget concerns will be over soon,” said Patrick Cheng, a foreign-exchange analyst at Haitong International Securities Co. in Hong Kong. “The PBOC will keep yuan appreciation at a steady pace given its target to stimulate domestic consumption, while the export outlook remains grim.”

The yuan climbed 0.03 percent to 6.2306 per dollar as of 10:02 a.m. in Shanghai, according to the China Foreign Exchange Trade System. The currency has strengthened 0.21 percent this week, taking this year’s gain to 1 percent. One-month implied volatility, a measure of expected moves in exchange rates used to price options, dropped 14 basis points, or 0.14 percentage point, to 1.75 percent.

Comprehensive Reform

China’s political will to push through more comprehensive economic reform is “seemingly stronger than we originally expected,” Credit Suisse Group AG Hong Kong-based analyst Vincent Chan wrote in a report today. There’s a good chance the government will introduce a comprehensive economic plan in October 2013, he wrote.

The Hong Kong Monetary Authority injected HK$4.42 billion ($570 million) into its banking system yesterday to prevent the city’s currency from rising beyond its permitted trading range. The aggregate balance will increase to HK$246 billion tomorrow.

In Hong Kong’s offshore market, the yuan rose 0.03 percent to 6.2078 per dollar, according to data compiled by Bloomberg. Twelve-month non-deliverable forwards advanced 0.03 percent to 6.3115, a 1.3 percent discount to the onshore spot rate.

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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