April 20 (Bloomberg) -- Dennis Tan and Linan Liu, strategists at Deutsche Bank AG comment on the outlook for the yuan’s exchange rate and offshore yuan-denominated assets after the People’s Bank of China widened the currency’s trading band this week.
They made the comments in an e-mailed response to Bloomberg questions yesterday.
On the yuan:
“The behavior of the PBOC fixings will likely be ultimately more important for driving longer-term expectations of foreign-exchange implied volatility, than either changes to the policy bands or greater realized volatility of the yuan’s spot rate against the dollar.
“In May 2007, after China widened the policy band to 0.5 percent from 0.3 percent, foreign-exchange implied volatility did move higher immediately, but stabilized at the higher level shortly after that, as China continued to allow steady appreciation in yuan fixings.
On Dim Sum bonds:
“There should be limited upside risk to the yields on offshore yuan bonds, though markets could come under some pressure because of potentially higher volatility of the yuan spot and forwards.
“At the same time, the signal which this move gives for capital account convertibility should ultimately drive a strategic allocation into yuan assets in the offshore market, along with the expansion of RMB business in other regional centers, capping the upside pressure on bond yields.
On yuan deposits in Hong Kong:
“The band widening is unlikely to have any significant impact on offshore yuan deposits. Growth in offshore yuan deposits is determined more by the volume of yuan trade settlement flows, availability and attractiveness of yuan investment products, as well as expectations of yuan appreciation. The yuan trade settlement scheme is expanding and will help the offshore yuan deposits to grow too.”
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