Jan. 21 (Bloomberg) -- China’s yuan strengthened after the central bank raised the currency’s daily fixing from a one-week low and added funds to the financial system to ease a shortage of cash before the week-long Lunar New Year holiday.
The People’s Bank of China raised the reference rate by 0.03 percent to 6.1066 per dollar today. The world’s second-largest economy grew 7.7 percent from a year earlier in the fourth quarter, compared with 7.8 percent in the preceding three months. The benchmark seven-day repurchase rate jumped the most in a month yesterday before sliding today after the PBOC injected more than 255 billion yuan ($42 billion) into the financial system to meet demand for cash before the festive season starting Jan. 31.
“The liquidity crunch won’t immediately lead to higher funding costs in the short term,” said Tommy Xie, an economist in Singapore at Oversea-Chinese Banking Corp. “Still, such cash squeezes are not good for the market going forward, which could impact the economy and the yuan’s prospects.”
The yuan advanced 0.04 percent to 6.0505 per dollar in Shanghai, according to China Foreign Exchange Trade System prices. The spot rate was 0.93 percent stronger than the fixing, near the 1 percent upper limit of the currency’s daily trading band.
One-month implied volatility, a measure of expected moves in the exchange rate used to price options, rose one basis point, or 0.01 percentage point, to 1.19 percent.
The offshore yuan weakened 0.09 percent to 6.0272 per dollar as of 4:54 p.m. in Hong Kong, according to data compiled by Bloomberg. Twelve-month non-deliverable forwards declined 0.08 percent to 6.1017, a 0.84 percent discount to the onshore rate.
Short-term capital inflows that seek to profit from higher onshore yields may boost the yuan, Fan Gang, a former PBOC academic adviser and now director of China’s National Economic Research Institute, told reporters in Beijing today. China will manage the currency’s moves to prevent any big shock, Fan said.
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