Yuan Gains Most in a Week on Bets Europe Will Tackle Debt Crisis

China’s yuan advanced the most in more than a week after German Chancellor Angela Merkel backed the European Central Bank’s approach to resolving the region’s debt crisis, bolstering the outlook for Chinese exports.

The currency erased its weekly loss after Merkel said yesterday euro-area policy makers “feel committed to do everything we can to maintain the common currency.” Europe is one of the top export destinations for Asia’s largest economy. The People’s Bank of China may cut benchmark interest rates before lowering banks’ required reserve ratios to free up funds for lending, according to a front-page article in the Securities Times today.

“Merkel’s remarks have boosted sentiment on Asian currencies,” said Stella Lee, president of Success Futures & Foreign Exchange Ltd. in Hong Kong. “Europe’s actions are vital to Chinese exports outlook.” Speculation that “China’s long-awaited rate cut and more stimulus will soon occur also provide support to the” yuan, she said.

The yuan strengthened 0.11 percent, the most since Aug. 7, to close at 6.3585 per dollar in Shanghai, according to the China Foreign Exchange Trade System. The currency was little changed this week. One-month implied volatility, a measure of exchange-rate swings used to price options, dropped 15 basis points this week to 1.25 percent. The gauge was unchanged today.

In Hong Kong’s offshore market, the yuan gained 0.13 percent today to 6.3625 per dollar. Twelve-month non-deliverable forwards rose 0.04 percent to 6.4470 today, limiting this week’s decline to 0.3 percent. The contracts, which touched this year’s lowest level yesterday, traded at 1.4 percent discount to the onshore rate, data compiled by Bloomberg showed.

Trading Band

The PBOC raised the yuan’s reference rate by 0.07 percent, the most since Aug. 6, to 6.3449 per dollar today. The central bank yesterday set the daily fixing at the weakest level since Nov. 29. The currency traded at a 0.25 percent discount to the daily fixing, well within the 1 percent limit.

China should “suitably” allow a larger range for yuan to move to ensure that the effective exchange rate remains stable, Chen Daofu, a researcher at the State Council’s development research center wrote in a commentary published in the Shanghai Securities News today.

The People’s Bank of China may expand the yuan’s daily trading band against the dollar to 2.25 percent by early next year, Oriental Morning Post cited Lu Zhengwei, chief economist with Industrial Bank Co., as saying. Free yuan trading may start in 2015, the paper said, citing Lu.

China widened the yuan’s trading band to 1 percent in April, after having held the limit at 0.5 percent since May 2007.

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