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Yuan Forwards Weaken After China Reports Surprise Trade Deficit

Yuan forwards weakened the most in a month after China reported a surprise trade deficit for February, easing pressure on the currency to appreciate.

China reported an unexpected $7.3 billion trade deficit in February after a Lunar New Year holiday disrupted exports, the customs bureau said. Today’s number compares with a $6.5 billion surplus in January. Exports increased 2.4 percent from a year earlier and imports climbed 19.4 percent.

“If deficits are sustained, that would damp appreciation pressures,” said Patrick Bennett, a strategist in Hong Kong at Standard Bank Group Ltd. “With an emphasis on domestic consumption in the new five-year plan, along with continued commodity demand for infrastructure building, we might expect generally lower surpluses in the months and indeed years ahead.”

Twelve-month non-deliverable forwards declined 0.3 percent to 6.4398 per dollar as of 4:51 p.m. in Hong Kong, according to data compiled by Bloomberg. That’s the biggest drop since Feb. 11. The contract traded at 6.4170 per dollar before the trade data was released.

China’s trade surplus will fall to $150 billion this year and account for less than 1 percent of gross domestic product in one to two years, central bank adviser Li Daokui said in Beijing today. He added that it’s “reasonable” for the yuan to have a 5 percent to 6 percent annual gain.

The yuan slid 0.04 percent to 6.5747 per dollar in Shanghai, according to the China Foreign Exchange Trade System. The currency earlier strengthened as much as 0.04 percent after interest-rate increases in Thailand and South Korea fanned speculation China will also boost borrowing costs in its fight to tame inflation.

“Nominal currency appreciation is still required to curb a likely higher inflation print going forward,” said Nizam Idris, a Singapore-based currency strategist at UBS AG.”

The People’s Bank of China today raised the yield on three-month bills for the second consecutive week in open-market operations, to 2.7944 percent. The increase supports speculation policy makers will lift interest rates as soon as April, said Wee-Khoon Chong, a fixed-income strategist at Societe Generale SA in Hong Kong.

The People’s Bank raised interest rates by 25 basis points on Feb. 9, for the third time in four months. The benchmark one-year lending rate is 6.06 percent, and the one-year deposit rate is at 3.0 percent.

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