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Yuan Reaches Upper Limit on Optimism for U.S. Budget Resolution

China’s yuan reached the upper end of its trading limit on speculation the U.S. will succeed in avoiding the so-called fiscal cliff that threatens to push one of the Asian nation’s biggest export markets into recession.

Regional currencies and stocks advanced after President Barack Obama expressed confidence that he would reach agreement with Congress to avoid the $607 billion of spending cuts and tax increases. The yuan has gained 2.6 percent from this year’s low touched on July 25, which may help appease U.S. politicians who say China keeps the currency undervalued to boost trade. Obama is attending meetings of the Association of Southeast Asian Nations this week amid a spat between China and Japan over ownership of islands.

“Investor appetite has improved as they expect U.S. politicians will solve the problem in the end as no one could afford to see a halt to the economic recovery,” said Bruce Yam, a currency strategist at Sun Hung Kai Financial Ltd. in Hong Kong. “Obama may touch on China’s exchange rates but the region’s territorial disputes are more pressing.”

The yuan rose 0.02 percent to close at 6.2345 per dollar in Shanghai, according to the China Foreign Exchange Trade System. The currency traded at a 1 percent premium to the central bank’s daily fixing, the maximum it’s allowed to fluctuate. The People’s Bank of China lowered the reference rate by 0.05 percent to 6.2975 per dollar.

One-month implied volatility for the yuan, a measure of exchange-rate swings used to price options, dropped six basis points, or 0.06 percentage point, to 1.7 percent.

Next Step

China’s central bank Governor Zhou Xiaochuan said on Nov. 17 that full convertibility of the yuan will be the next step in the overhaul of the exchange-rate system as calls grow for the nation’s new leadership to deepen changes in the economy to sustain growth. Zhou, 64, wasn’t named to the new Communist Party central committee announced during the November leadership transition, heightening speculation that he will retire.

“Zhou is likely to retire and his remarks aren’t surprising as China has already been moving toward greater yuan flexibility in recent years,” said Yam. “While the export outlook remains grim, China doesn’t have the conditions to allow further yuan appreciation.”

In Hong Kong’s offshore market, the currency climbed 0.11 percent to 6.2346 per dollar, according to data compiled by Bloomberg. Twelve-month non-deliverable forwards gained 0.12 percent to 6.3398, a 1.7 percent discount to the onshore spot rate.

The one-month interbank rate on yuan deposits in Hong Kong was 2.15 percent today, down from a record 3.5 percent on Oct. 1, Bloomberg data showed.

Obama arrived in Myanmar today for a historic visit and is due to meet with Chinese Premier Wen Jiabao at the East Asia Summit in Cambodia this week. Asean leaders will discuss setting rules for operating in the South China Sea to try and solve the islands’ dispute between China and Japan.

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