Yuan Gains Most in Eight Weeks on Swap Deal, Yellen Nomination

China’s yuan gained the most in eight weeks as authorities agreed on a currency swap line with the European Central Bank and after Janet Yellen’s nomination as Federal Reserve chief signaled policy continuity.

The ECB and the People’s Bank of China agreed to set up a three-year swap of a maximum 350 billion yuan ($57 billion), the ECB said in a statement today. President Barack Obama nominated Yellen, currently Fed vice chairman, to succeed Ben S. Bernanke in January. The appointment means there will be a “prolonged period of appreciation” for the yuan because of a “relatively longer period” of expansionary U.S. monetary policy, former PBOC academic adviser Li Daokui said in an interview.

“The ECB swap line could be a trigger for yuan purchases as it signals the currency’s outlook remains positive,” said Liu Dongliang, a senior analyst at China Merchants Bank Co. in Shenzhen.

The yuan rose 0.09 percent, the most since Aug. 15, to close at 6.1158 per dollar in Shanghai, China Foreign Exchange Trade System prices show. The PBOC lowered its daily fixing by 0.04 percent, the most since Sept. 6, to 6.1452. The yuan was 0.48 percent stronger than the PBOC’s reference rate, within the 1 percent limit.

Averting Default

U.S. congressional leaders are open to a short-term increase in the nation’s $16.7 trillion debt ceiling to avert a default, according to Republican and Democrat aides who spoke on the condition of anonymity. As the Fed’s No. 2 official, Yellen has articulated the case for maintaining highly accommodative monetary policy. In a series of 2012 speeches, she outlined why rates could remain near zero into late 2015.

“Investors are in wait-and-see mode, given the uncertainty over the U.S. debt ceiling,” said Daniel Chan, a director at China Silver Global Investment Consultant Ltd. in Hong Kong. “It looks like lawmakers are working to avoid chaos. Yellen is known to be more dovish, so tapering under her leadership will be gradual. That would be positive for the yuan.”

Foreign investors can remit offshore yuan to invest in domestic financial institutions in China, according to a statement by the PBOC today.

In Hong Kong’s offshore market, the yuan climbed 0.03 percent to 6.1112 per dollar, according to data compiled by Bloomberg. Twelve-month non-deliverable forwards gained 0.09 percent to 6.1807, a 1.1 percent discount to the onshore rate.

One-month implied volatility in the onshore yuan, a measure of expected moves in the exchange rate used to price options, fell two basis points, or 0.02 percentage point, to 1.22 percent.

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