JPMorgan Sees Yuan Band Widening in 3 Months After SAFE Rule
JPMorgan Chase & Co. said China may widen the yuan’s trading band in the next three months after the foreign-exchange regulator announced rules to deter speculative funds from betting on appreciation.
The State Administration of Foreign Exchange said May 5 it would put in measures to increase monitoring of cross-border trade flows and ordered banks to adjust currency positions so that dollar loans are kept at a certain proportion to deposits. Patrick Wu, head of yuan trading at JPMorgan, the largest U.S. bank by assets, said the move may be part of preparations to broaden the band.
“If SAFE widened the band without the new measure, it would trigger more speculation,” Wu said in an interview yesterday in Shanghai. “However, if they introduce the measure, it would be more helpful to push down the yuan’s spot level and give SAFE more room to widen the band because corporates and banks will have to reduce short-dollar positions.”
The government has pledged to allow more flexibility in the exchange rate and promote freer movement of capital in and out of the country for investment purposes. China’s State Council, or cabinet, signaled May 6 it will propose plans this year for yuan capital-account convertibility. The central bank last widened the band in April 2012, to 1 percent from 0.5 percent.
The People’s Bank of China sets a daily reference rate against the dollar around 9:15 a.m. in Shanghai. The yuan has been within 0.1 percent of the upper limit on most days since October. The fixing was weakened 0.06 percent to 6.2070 today. Wu said the reference rate may strengthen to 6.10 by year-end.
“There will be fewer speculative foreign-exchange trades in the onshore market because banks have limitations in making loans for corporates to go long on the yuan and short on dollars,” said Wu. “The whole outlook for the yuan still remains unchanged.”
The yuan weakened 0.06 percent to 6.1462 per dollar as of 2:22 p.m. in Shanghai, according to the China Foreign Exchange Trade System. It touched 6.1307 on May 9, the strongest level since the government unified official and market exchange rates at the end of 1993. A long position is a bet that a currency will appreciate while a short position anticipates a decline.
China’s currency has appreciated 1.5 percent in the last three months, the third-best performance among 24 emerging-market currencies tracked by Bloomberg after the Mexican peso and Malaysia’s ringgit.
Widening of the band is likely in June or shortly after, Credit Agricole CIB strategist Dariusz Kowalczyk wrote in a research note on May 7. With the new foreign-exchange position limits for banks, policy makers were likely trying to reduce speculative capital and prepare ground for foreign-exchange regime relaxation, Hong Kong-based Kowalczyk said.
The band may be expanded around June, before the U.S.-China Strategic Economic Dialogue in Washington during the week of July 8-12, Bank of America Merrill Lynch strategist Christy Tan in Singapore wrote in a report on April 24. The PBOC may widen the band against the dollar to 1.5 percent or 2 percent, while 1.5 percent is more likely, Tan said.
China is testing the yuan’s exchange-rate equilibrium and may soon double its trading band, Shanghai Securities News reported May 13, citing people it didn’t identify.
A widening is likely “in the near future,” People’s Bank of China Deputy Governor Yi Gang said in April. China will push ahead with opening its capital account because current economic conditions are favorable, Yi said.
One-year implied volatility in the onshore yuan, a measure of exchange-rate swings used to price options, rose nine basis points, or 0.09 percentage point, to 2.43 percent, according to data compiled by Bloomberg. That’s the highest since Jan. 15.