Yuan Volatility Drops to Nine-Month Low on PBOC Stability Bets

Updated on
  • Sentiment improving as central bank defends key level: OCBC
  • Signs of calm compare with devaluation turmoil a year ago

A gauge of swings in the yuan fell to the lowest level since November amid receding bearish bets and speculation China’s central bank is helping keep the exchange rate stable.

The currency’s three-month implied volatility, which is used to price options, dropped 13 basis points to 4.6 percent as of 4:30 p.m. in Hong Kong, according to data compiled by Bloomberg. The extra cost for three-month options to sell the yuan against the dollar in the Hong Kong market over contracts to buy was near the lowest level since September 2014.

The signs of calm are a far cry from a year ago, when a record 1.9 percent yuan devaluation on Aug. 11, ignited turmoil in global markets. This time, the People’s Bank of China is going to great lengths to maintain stability, by talking up the exchange rate and setting a series of stronger reference rates after the currency weakened beyond 6.7 a dollar for the first time since 2010. 

"Sentiment is improving after the PBOC showed its near-term defense of 6.7 per dollar," said Tommy Xie, an economist at Oversea-Chinese Banking Corp. in Singapore. "The market is reassessing their views. I expect more portfolio flows to China’s bond market from offshore investors, which will support a balanced flow and the yuan in the second half of the year."

Foreign investors boosted holdings of China’s sovereign bonds for the ninth month in a row to 321.9 billion yuan ($48.5 billion) in July, according to latest official official data.

Stability Pledge

The nation will keep the exchange rate basically steady at an equilibrium level, the PBOC said Wednesday. That goal is being made easier by signs that the world’s second-largest economy is stabilizing and by waning expectations of a Federal Reserve interest-rate increase. The chances of the yuan sliding beyond 7 per dollar this year receded to 9.7 percent this week, less than a third of the odds given in January, options prices show.

A gauge of the greenback’s strength dropped 1.5 percent in the past two weeks, making it easier for the PBOC to steady the yuan as the nation prepares to host a Group of 20 summit in the eastern city of Hangzhou in September and ahead of the currency’s entry into the International Monetary Fund’s reserves in October. A private factory gauge from Caixin Media and Markit Economics suggested expansion in the manufacturing sector last month.

The yuan traded in Hong Kong fell 0.3 percent from July 29 and 0.1 percent on Friday to 6.6531 a dollar. The onshore rate in Shanghai was little changed for the day and down 0.05 percent for the week. A Bloomberg replica of the trade-weighted CFETS RMB Index, which tracks the yuan against 13 currencies, posted its first weekly decline since the five-day period through July 8.

Curve Steepens

Government bonds gained, with the one-year yield falling three basis points from a week ago to 2.18 percent for a sixth weekly decline, according to National Interbank Funding Center prices. The yield widened its spread with that on 10-year sovereign debt to the most since June 13 as of Thursday, data compiled by Bloomberg show.

The PBOC drained a net 161.5 billion yuan from the financial system in open-market operations in the past five days, after injecting funds in the last two weeks of July, data compiled by Bloomberg show.

— With assistance by Tian Chen

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