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Yuan Forwards Post Best Week in a Month on Convertibility Bets

China’s yuan forwards posted the biggest weekly advance in more than a month as central bank officials signaled they will allow a more flexible exchange rate and widen the daily trading limit in the onshore currency.

The People’s Bank of China will “basically” end normal intervention in the foreign-exchange market, Governor Zhou Xiaochuan said in a book explaining reforms outlined at a Communist Party meeting last week, without giving a timeframe. Deputy Governor Yi Gang said Nov. 20 that it’s no longer in China’s interest to increase its foreign-currency holdings, adding to signs policy makers will rein in dollar purchases that limit the yuan’s appreciation.

“Zhou and Yi’s comments show that China is accelerating the pace of yuan convertibility, which is positive to the market,” said Patrick Cheng, a Hong Kong-based senior analyst at Goldenway Group, a foreign-exchange brokerage.

Twelve-month non-deliverable forwards climbed 0.16 percent this week to 6.1536 per dollar as of 4:52 p.m. in Hong Kong, according to data compiled by Bloomberg. The contracts slipped 0.06 percent today and traded at a 0.97 percent discount to the spot rate in Shanghai.

The onshore spot rate was little changed for the week and today at 6.0936 per dollar in Shanghai, 0.73 percent premium to the daily fixing, China Foreign Exchange Trade System prices show. The PBOC set the daily reference rate, which limits the yuan’s movements to 1 percent on either side, 0.02 percent weaker at 6.1380 today.

Bond Sale

The Ministry of Finance sold 7 billion yuan ($1.15 billion) of Dim Sum bonds to institutional investors yesterday in Hong Kong. The three-year tranche received 20.5 billion yuan of applications for the 5 billion yuan sale, according to the Hong Kong Monetary Authority. The five-year portion got 5.4 billion yuan orders for the 2 billion yuan issuance, HKMA said.

In Hong Kong’s offshore market, the yuan slipped 0.04 percent for the week and 0.07 percent today to 6.0769 per dollar, according to data compiled by Bloomberg. One-month implied volatility in the onshore yuan, a measure of expected moves in the exchange rate used to price options, fell 10 basis points, or 0.10 percentage point, to 1.55 percent this week. The gauge was little changed today.

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