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Yuan Poised for Weekly Gain on Fixings Ahead of U.S. Dialogue

The yuan was poised for a weekly gain as China fixed its reference rate at the highest level since 2005 ahead of a meeting next week with U.S. officials.

The People’s Bank of China set its daily fixing 0.07 percent stronger at 6.2787 against the dollar. The rate has been lifted by 0.34 percent in the last three days. The fourth round of the U.S.-China strategic and economic dialogue will be held in Beijing on May 3 and May 4 and will be attended by U.S. Treasury Secretary Timothy F. Geithner, Secretary of State Hillary Clinton and Chinese Vice Premier Wang Qishan.

“There’s fear in the market these friendly fixings will be reversed once the dialogue is finished,” said Jonathan Cavenagh, a currency strategist at Westpac Banking Corp. in Singapore. “We’ve certainly seen that in the past. The theory is the broader macroeconomic backdrop for China is still very uncertain.”

The yuan strengthened 0.03 percent this week to 6.3066 per dollar as of 10:51 a.m. Shanghai, according to the China Foreign Exchange Trade System. It dropped 0.01 percent today. The currency is allowed to move as much as 1 percent either side of the fixing. In Hong Kong’s offshore market, the yuan fell 0.04 percent to 6.3068 today and was little changed this week.

One-month implied volatility for the yuan, a measure of exchange-rate swings used to price options, was unchanged today and fell 10 basis points, or 0.10 percentage point, this week to 2 percent.

China’s capital inflows fell in the first quarter, leading to a smaller increase in foreign reserves as the government allows greater currency flexibility to seek more balanced international payments.

Forwards Decline

Net inflows under the capital account dropped by 56 percent from a year earlier to $49.9 billion, the State Administration of Foreign Exchange said in a statement on its website on April 26. The trade surplus narrowed 14 percent to $24.7 billion, showing that cross-border fund flows are “more balanced,” the agency said.

Gross domestic product increased 8.1 percent in the first quarter from a year earlier, the least in almost three years, after an 8.9 percent gain in the previous three months, official data showed April 13.

Twelve-month non-deliverable forwards declined 0.15 percent this week to 6.3500 per dollar in Hong Kong, 0.7 percent weaker than the onshore spot rate, according to data compiled by Bloomberg. The contracts were little changed today.

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