Yuan Snaps 13-Week Gain on Speculation Export Outlook Worsening

Yuan Gains Most in Two Weeks, Tests Trading Band
China’s yuan rose the most in two weeks, touching the upper limit of its trading band. Photographer: Andrew Harrer/Bloomberg

China’s yuan snapped a 13-week rally, its longest winning streak since March 2008, on speculation the nation will struggle to boost export growth as the fiscal cliff looms in the U.S. and Europe’s debt crisis remains unresolved.

Overseas sales probably climbed 10 percent in October, compared with a 16 percent increase in the same month last year, a Bloomberg survey shows before a report due tomorrow. The currency rose 2.4 percent since reaching this year’s low on July 25, and tested the upper limit of its trading band for a fifth day today. Consumer prices rose 1.7 percent in October from a year earlier, the least since January 2010, data showed today.

“Easing inflation signals China’s growth is still subdued,” said Bruce Yam, a currency strategist at Sun Hung Kai Financial Ltd. in Hong Kong. “Room for further yuan appreciation is limited by the poor outlook for exports.”

The yuan dropped 0.06 percent this week and 0.03 percent today to close at 6.2450 per dollar in Shanghai, according to the China Foreign Exchange Trade System. The onshore spot touched 6.2382 earlier, exceeding the central bank’s daily fixing. The People’s Bank of China strengthened the reference rate by 0.08 percent today, the most since Oct. 17, to 6.3012.

The yuan will retreat 0.9 percent by the end of December, according to the median estimate in a Bloomberg survey.

President Hu Jintao said at the Communist Party Congress yesterday that China must double per-capita income by 2020 and boost domestic demand. The economy slowed in each of the last seven quarters and exports are threatened by $600 billion of tax increases and spending cuts in the U.S. set to take effect in January, the so-called fiscal cliff.

Trading Band

China should widen the trading band soon to avoid “huge” capital outflows, China Securities Journal said today in a commentary, citing unidentified analysts. PBOC Governor Zhou Xiaochuan said yesterday the nation will gradually realize yuan convertibility under the capital account, without giving a timetable.

Growth is expected to rebound in the fourth quarter and the first quarter of 2013, Yao Wei, China economist for Societe Generale SA in Hong Kong, said yesterday. Gross domestic product expanded 7.4 percent in the third quarter and is forecast to climb 7.7 percent in the current period, according to the median estimate in a Bloomberg survey of economists.

In Hong Kong’s offshore market, the yuan was headed for a 15th straight weekly advance, the longest winning streak since trading began in the third quarter of 2010. The currency gained 0.14 percent this week and 0.05 percent today to 6.2328 per dollar, according to data compiled by Bloomberg.

Offshore Yuan

“While it is fair to assume that the onshore spot rate will be stable during the congress, the offshore yuan will take the lead with regards to the reaction,” said Pack Mackel, the head of Asian currency research at HSBC Holdings Plc in Hong Kong.

Twelve-month non-deliverable forwards gained 0.14 percent today to 6.3463 per dollar, a 1.6 percent discount to the onshore spot rate. The contracts advanced 0.16 percent this week. One-month implied volatility for the onshore yuan, a measure of exchange-rate swings used to price options, was steady at 1.6 percent today and this week.

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