April 17 (Bloomberg) -- China’s yuan rallied the most in four months to reach a 19-year high after the central bank raised the daily reference rate to a record and an official said the currency’s trading band may be widened.
The currency closed at the upper limit of its 1 percent trading band after the People’s Bank of China strengthened the fixing by 0.11 percent to 6.2342 per dollar. The central bank will broaden the permitted range in its next reforms, the China Daily reported, citing Wang Yu, deputy director-general of the PBOC’s research bureau. The gain reflects efforts to pre-empt criticism from policy makers gathering for Group of 20 and International Monetary Fund meetings in Washington this week, according to Australia & New Zealand Banking Group Ltd.
“China is making a case for its yuan policy by letting it appreciate going into the meetings,” said Irene Cheung, a currency strategist in Singapore at ANZ. “The trading band news added some excitement but it’s already expected as part of long-term market reform.”
The yuan strengthened 0.17 percent to 6.1723 per dollar in Shanghai, the biggest advance since Dec. 13, according to prices from the China Foreign Exchange Trade System. It’s also the strongest level since the government unified official and market exchange rates at the end of 1993.
The PBOC increased the yuan band to 1 percent from 0.5 percent on April 16 last year. The China Daily report didn’t give details of how much the range will be widened by or when.
China has been criticized by some countries, particularly the U.S., for what they say is an undervalued yuan that benefits the Asian nation’s exporters.
The U.S. Treasury Department asked Japan to refrain from devaluing the yen, while declining to name China as a currency manipulator in a semi-annual report to Congress on April 12. The G-20 nations meet in Washington on April 18-19, while the IMF begins its three-day gathering on April 19.
The yuan is “moderately undervalued” and China needs to widen the band in the medium term, Markus Rodlauer, the IMF’s China mission chief, said in a March 21 Bloomberg TV interview.
The existing 1 percent band is “appropriate,” PBOC Deputy Governor Yi Gang said March 11 in Beijing. The central bank reiterated April 3 that it will keep the exchange rate “basically” stable and pledged to further reform the foreign-exchange mechanism.
“I do believe that there will be a band widening sometime in the second quarter,” said Sean Yokota, head of Asia strategy at Skandinaviska Enskilda Banken AB in Singapore. “You do have a political transition finishing and they do want to liberalize the yuan” to cope with appreciation pressure from capital inflows, he said.
Yuan positions at Chinese financial institutions stemming from foreign-exchange transactions, a gauge of cross-border capital flows, climbed 295 billion yuan ($48 billion) in February, central bank data showed on April 10. Increases are a sign of inflows and January’s 684 billion yuan gain was a record.
In Hong Kong’s offshore market, the yuan advanced 0.13 percent to 6.1788 per dollar, data compiled by Bloomberg show. Twelve-month non-deliverable forwards advanced 0.13 percent to 6.2490, a 1.2 percent discount to the spot rate in Shanghai.
One-month implied volatility in the onshore yuan, a measure of expected moves in the exchange rate used to price options, rose five basis points, or 0.05 percentage point, to 1.44 percent.
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