The PBOC is welcoming the currency’s recent price swings in preparation for a band-widening to plus-or-minus two percent, Nordvig forecasts, which would be twice the current range. The yuan’s three-month implied volatility surged 42 percent on Feb. 21, the biggest intraday jump in more than 16 months.
The Chinese central bank wants to “have some two-way risk embedded in the market before they take that step,” Nordvig, the New York-based managing director of currency research at Nomura, said in an interview on Bloomberg Radio’s “Surveillance” with Tom Keene and Michael McKee. “They’re getting ready for a band-widening. It could happen in the next few weeks.”
The yuan depreciated 0.5 percent to 6.1266 per dollar today, according to China Foreign Exchange Trade System prices. The currency weakened for a sixth straight day, dropping the most on a closing basis since December 2008.
The yuan’s 35 percent advance against the greenback since a dollar peg ended in July 2005 is the best performance among 24 emerging-market currencies tracked by Bloomberg. Two-way capital flows will become the “new norm” for China and the exchange rate is likely to be more volatile as U.S. monetary stimulus is reined in, China’s State Administration of Foreign Exchange said today in a report.
The recent price fluctuations have been “very painful for market participants,” Nordvig said. “We’re not used to volatility in the Chinese currency. It’s very heavily managed.”
The PBOC plans to expand the yuan’s trading band in an “orderly” manner this year, it said last week. That was the first time the central bank gave such a specific timeframe for the proposed change, according to Credit Agricole CIB. The yuan’s band was last widened in April 2012 from 0.5 percent, and before that from 0.3 percent in May 2007.
Volume in over-the-counter options on the dollar-yuan exchange rate amounted to $19 billion, the largest share of trades at 42 percent, according to data reported by U.S. banks to the Depository Trust Clearing Corp. and tracked by Bloomberg. Dollar-yuan options trading was 193 percent more than the average for the past five Tuesdays at a similar time in the day, according to Bloomberg analysis.
The yuan is expected to strengthen 2.6 percent in the remainder of this year, based on the median estimate in a Bloomberg survey of analysts. Mexico’s peso is the only emerging-market currency forecast to do better.
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