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Yuan Posts Best Two-Day Rally Since May After Volatility Push

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The yuan slumped 1.4 percent in February, its worst month on record, amid speculation the People’s Bank of China wants to end the currency’s steady appreciation before a possible widening of the trading band. Photographer: SeongJoon Cho/Bloomberg

March 6 (Bloomberg) -- China’s yuan posted its biggest two-day rally since May 2013 on speculation the central bank is allowing gains after guiding the currency weaker to engineer more two-way volatility.

The yuan climbed 0.16 percent to close at 6.1185 per dollar in Shanghai, according to China Foreign Exchange Trade System prices. It has advanced 0.4 percent in two days. The currency was 0.1 percent stronger than the People’s Bank of China’s daily reference rate, which was raised 0.01 percent to 6.1249. The yuan is allowed to diverge a maximum 1 percent from the fixing.

The yuan slumped 1.4 percent in February, its worst month on record, amid speculation the PBOC wants to end the currency’s steady appreciation before a possible widening of the trading band. China’s economic-growth target for this year is 7.5 percent, unchanged from 2013, Premier Li Keqiang said at the annual National People’s Congress in Beijing yesterday. Gross domestic product increased 7.7 percent last year.

“It looks like the PBOC has retreated from weakening the yuan further as it has achieved the goal of squeezing out the one-way bets on gains,” said Banny Lam, Hong Kong-based co-head of research at Agricultural Bank of China International Securities Ltd. “China’s GDP target this year also showed the government is willing to steer growth when needed as reforms are undergoing.”

Don’t Panic

The “general principal” for the yuan’s exchange-rate reform is to give market forces a bigger role, PBOC Deputy Governor Pan Gongsheng said on the sidelines of sessions of the Chinese People’s Political Consultative Conference in Beijing today. Recent yuan fluctuations are “normal” and there’s no reason to panic about the yuan weakening, he said.

A widening of the currency’s trading band may be imminent as Premier Li “explicitly” mentioned it in this year’s working plan, suggesting it is being given greater priority than last year, Zhang Zhiwei, an economist at Nomura Holdings Inc. in Hong Kong, wrote in a research note yesterday.

In Hong Kong’s offshore trading, the yuan rose 0.31 percent to 6.1064 per dollar, data compiled by Bloomberg show. Twelve-month non-deliverable forwards strengthened 0.15 percent to 6.1550, trading at a 0.6 percent discount to the Shanghai spot rate.

One-month implied volatility in the onshore yuan, a measure of expected moves in the exchange rate used to price options, slipped eight basis points, or 0.08 percentage point, to 1.78 percent, according to data compiled by Bloomberg.

To contact the reporter on this story: Fion Li in Hong Kong at fli59@bloomberg.net

To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net

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