Yuan Forwards Set for Best Month in a Year as Global Usage Grows

Yuan forwards headed for the biggest monthly advance since January 2012 on expectations China will allow appreciation to pick up as the currency becomes more widely used for trade and investment globally.

Global yuan payments increased 32.7 percent in March from the previous month, the Society for Worldwide Interbank Financial Telecommunication announced April 25, the same day Hong Kong Monetary Authority said that the value of trade settled in China’s currency by the city’s banks rose 45 percent from a year earlier in the first quarter to 830 billion yuan ($135 billion). Morgan Stanley raised its end-2013 yuan forecast to 6.1 per dollar from 6.3 yesterday, citing prospects for a wider trading band and a larger base of market participants.

Twelve-month non-deliverable forwards rose 1.2 percent this month to 6.23 per dollar as of 11:11 a.m. in Hong Kong, according to data compiled by Bloomberg. The contracts gained 0.03 percent today and traded at a 1 percent discount to the closing spot rate in Shanghai on April 26. China’s financial markets are shut for a three-day Labor Day holiday and trading will resume on May 2.

“The yuan is likely to gain further when its trading band is widened,” said Patrick Cheng, foreign-exchange analyst at Haitong International Securities Co. in Hong Kong. “Growing demand for yuan as an investment and reserve currency will also support the exchange rate.”

Hong Kong Monetary Authority relaxed yuan capital rules for local banks last week, a move BNP Paribas Investment Partners predicts will increase liquidity and offshore lending. Australia’s central bank announced plans this month to put about 5 percent of its foreign-exchange reserves in China.

Trading Band

People’s Bank of China Deputy Governor Yi Gang said April 18 that the yuan’s trading band would be widened “in the near future.” The last revision, which doubled the maximum permitted divergence from the central bank’s reference rate to 1 percent, was announced on April 14, 2012. The fixing was set at a record 6.2208 per dollar on April 26, when the currency reached a 19- year high of 6.1616 in Shanghai.

The onshore spot rate appreciated 0.74 percent this month, the best performance since October. In Hong Kong’s offshore market, the currency advanced 0.7 percent, the biggest gain in six months. It’s steady today, after earlier touching a record 6.1592.

One-month implied volatility in the onshore yuan, a measure of exchange-rate swings used to price options, climbed 20 basis points, or 0.2 percentage point, to 1.41 percent this month. It is poised for the first monthly increase of 2013.

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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