Yuan Halts Three-Day Advance as PBOC Fixing Forces a Retreat

China’s yuan snapped a three-day gain as the central bank cut the fixing to a level that forced to currency to weaken to remain within its permitted trading range.

The People’s Bank of China lowered the reference rate by 0.06 percent to 6.2911 per dollar, 1.05 percent less than yesterday’s closing level. The yuan is allowed to trade a maximum of 1 percent on either side of the daily fixing. The Dollar Index climbed 0.2 percent in the last two days. China’s efforts to stabilize growth, including proactive fiscal and prudent monetary policies, are “effective” and “ample,” according to a front-page commentary today in the Financial News.

“The fixing is an adjustment to a stronger dollar overnight,” said Dariusz Kowalczyk, a senior strategist and regional economist at Credit Agricole CIB in Hong Kong. “There aren’t any major political or external reasons for yuan appreciation. We’ll have some consolidation or a minor correction before appreciation resumes next year.”

The yuan fell 0.05 percent to close at 6.2282 per dollar in Shanghai, according to the China Foreign Exchange Trade System. That’s 1 percent more than today’s reference rate. One-month implied volatility, a measure of expected moves in exchange rates used to price options, was steady at 1.53 percent.

China should steadily push toward interest-rate liberalization and a market-oriented exchange-rate mechanism, the unsigned Financial News commentary said. An open yuan capital account should be promoted, it said.

Current Account

The yuan will rise to 6.15 per dollar by the end of 2013, Haibin Zhu, the Hong Kong-based chief China economist at JPMorgan Chase & Co., told reporters in the city today.

“The most important fundamental factor is the current-account surplus,” he said. “We expect, in the next few years, the current-account surplus will remain at around 3 percent of gross domestic product.” The excess was 2.7 percent of GDP last year and 3.9 percent in 2010, official data show.

The central bank is likely to widen the yuan’s trading band to 2 percent in the next 18 months, Zhu said.

In Hong Kong’s offshore market, the yuan was steady at 6.2105 per dollar, according to data compiled by Bloomberg. Twelve-month non-deliverable forwards dropped 0.03 percent to 6.3155, a 1.4 percent discount to the onshore spot rate, figures compiled by Bloomberg show.

The U.K. needs a yuan swap agreement with China to unleash London’s potential as an offshore trading center for the currency, Xia Bin, a former adviser to the People’s Bank of China, said at a meeting of the London Advisory Council for China yesterday.

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