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Yuan Climbs to Five-Month High Before China Manufacturing Report

Aug. 19 (Bloomberg) -- China’s yuan climbed to a five-month high before a report that’s forecast to show manufacturing expanded for a third straight month.

A preliminary reading for a Purchasing Managers Index will be 51.5 for August, according to the median estimate in a Bloomberg survey before HSBC Holdings Plc and Markit Economics releases the data on Aug. 21. A reading above 50 indicates factory output grew and July’s 51.7 was the highest since January 2013. China has cut reserve ratios for some banks and reduced taxes for smaller businesses in the past three months to safeguard its economic growth goal of about 7.5 percent.

“China’s economy is recovering because of the mini-stimulus that the government implemented earlier, which boosts the outlook for the yuan,” said Kenix Lai, Hong Kong-based currency strategist at Bank of East Asia Ltd. She forecast the currency will trade in a range of 6.05 per dollar to 6.07 by the end of this year in Shanghai.

The currency strengthened 0.03 percent to close at 6.1418 per dollar in Shanghai, China Foreign Exchange Trade System prices show. The currency touched 6.1366 earlier today, the strongest level since March 13. The People’s Bank of China cut the daily reference rate by 0.04 percent to 6.1548 per dollar. The onshore spot rate traded 0.2 percent stronger than the PBOC’s fixing, the biggest premium since February and within the 2 percent limit of its permitted trading range.

In Hong Kong’s offshore market, the yuan was little changed at 6.1413 per dollar, after rising to a five-month high of 6.1355, data compiled by Bloomberg show. Twelve-month non-deliverable forwards gained 0.05 percent to 6.2115. The contracts jumped 0.4 percent in the past four days, narrowing their discount to the Shanghai spot rate to 1.1 percent.

‘Cargo Train’

“Going against the appreciating trend is like jumping in front of a rolling cargo train and we continue to sit on our long offshore yuan position opened at the end of May,” said Dariusz Kowalczyk, Hong Kong-based strategist at Credit Agricole CIB. “Buying flows are likely coming from corporates, which resumed selling of their foreign-exchange surpluses in July, and possibly from Russian investors diversifying away from the dollar and the euro.”

The U.S. and European Union have imposed sanctions on some Russian individuals and companies in response to Russia annexing Crimea and supporting separatist rebels in Ukraine.

One-month implied volatility in the onshore yuan, a gauge of expected swings in the exchange rate used to price options, jumped 10 basis points, or 0.1 percentage point, to 1.55 percent.

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

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

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