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China Yuan Volatility Near 2010 Low; Money Rates Decline in Week

Volatility in the yuan was near a three-year low after the People’s Bank of China signaled it is prepared to manage the impact of a stimulus reduction by the Federal Reserve. Money-market rates fell this week.

PBOC Governor Zhou Xiaochuan said China has ample measures to cope with any halt in quantitative easing policies, used to pump money into markets via asset purchases, by developed nations, the official Xinhua News Agency reported today. The monetary authority has limited changes in the yuan’s daily reference rate to a maximum of 0.05 percent in the past three weeks, keeping the measure close to 6.17 per dollar.

“The PBOC has been setting the fix in a stable manner despite the selloff in emerging-market currencies,” said Khoon Goh, a strategist at Australia & New Zealand Banking Group Ltd. in Singapore. “That has given comfort that the yuan will remain resilient even as the Fed begins to taper the QE program at the upcoming meeting.”

One-month implied volatility in the yuan, a measure of expected moves in the exchange rate used to price options, fell to as low as 1.01 percent yesterday, the least since June 2010, from 1.08 percent at the end of last week, according to data compiled by Bloomberg. It was little changed today at 1.08 percent as of 4:20 p.m. in Shanghai.

Twelve-month non-deliverable forwards fell 0.06 percent today and 0.03 percent this week to 6.2393, according to data compiled by Bloomberg. The contracts traded at a 1.9 percent discount to the Shanghai’s spot rate, which was little changed at 6.1205 versus 6.1199 yesterday and 6.1195 a week ago, China Foreign Exchange Trade System prices show.

Best Performer

The Chinese currency, this year’s best-performer in Asia with a 1.8 percent gain, is allowed to diverge a maximum 1 percent on either side of the reference rate, which was lowered 0.05 percent to 6.1728 today. In Hong Kong’s offshore market, the yuan was at 6.1144, from 6.1165 on Aug. 30, according to data compiled by Bloomberg.

China’s money-market rates declined this week after the central bank’s fund injections helped boost cash supply in the financial system. The monetary authority added 10 billion yuan ($1.6 billion) to markets via 14-day reverse-repurchase contracts at 4.1 percent yesterday, according to a statement posted on its website. The monetary authority pumped in a similar amount using seven-day reverse repos on Sept. 3.

The seven-day repo rate, a gauge of cash availability in the banking system, fell 26 basis points, or 0.26 percentage point, from Aug. 30 to 3.47 percent in Shanghai, according to a weighted average compiled by the National Interbank Funding Center. It rose one basis point today.

The cost of one-year interest rate swaps, the fixed payment to receive the floating seven-day repo rate, was little changed today and fell four basis points this week to 4.09 percent, data compiled by Bloomberg show.

China began treasury futures trading today for the first time in 18 years, enabling investors in Asia’s second-largest government bond market to limit risk as controls on interest rates and capital flows ease. The most-active December contract gained 0.02 to 94.192.

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