Yuan Forwards at Deepest Discount in Three Weeks on Europe Debt

Yuan forwards traded at the deepest discount to the onshore spot rate in three weeks as renewed speculation Europe will be unable to contain its debt crisis added to concern the global economy is deteriorating.

Spain’s borrowing costs rose yesterday after the central bank said the nation’s recession will worsen in coming months. There are signs short-term capital inflows to China increased due to monetary easing in the U.S. and Europe, Zhang Monan, a researcher with the State Information Center, wrote in a commentary in the China Daily today. A preliminary reading on China’s manufacturing activities in October was 49.1, from a final level of 47.9 last month, HSBC Holdings Plc and Markit Economics said today.

“The risk-off sentiment sparked by Spain is weighing on the yuan today,” said Stella Lee, Hong Kong-based president at Success Futures & Foreign Exchange Ltd. “Yet we continue to see inflows into China positioning for a growth rebound, which will support the currency in the near term.”

Twelve-month non-deliverable forwards declined 0.08 percent to 6.3710 per dollar as of 4:33 p.m. in Hong Kong, according to data compiled by Bloomberg. The contracts traded at a 1.9 percent discount to the spot rate in Shanghai, which was unchanged at 6.2480 as the China Foreign Exchange Trade System prices showed. That’s the biggest gap since Oct. 3.

The currency has advanced 0.7 percent this year, after rallying 4.7 percent in 2011. The yuan will appreciate slower than most people think, Bert Hofman, the World Bank’s chief economist for East Asia and the Pacific, said today.

The People’s Bank of China set the reference rate at 6.3081 per dollar today, just shy of 6.3078 yesterday. The currency can trade as much as 1 percent on either side of the fixing.

In Hong Kong’s offshore market, the currency gained 0.05 percent to 6.2485 per versus the greenback, according to data compiled by Bloomberg.

One-month implied volatility for the onshore yuan, a measure of exchange-rate swings used to price options, declined five basis points, or 0.05 percentage point, to 1.45 percent.

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