Yuan Forwards Drop as PBOC Lowers Fixing Before China-U.S. Talks

Yuan forwards fell for a second day after the central bank lowered its reference rate, limiting scope for appreciation after Chinese President Xi Jinping met U.S. Treasury Secretary Jacob L. Lew in Beijing for talks.

The People’s Bank of China set the yuan reference rate at a one-week low of 6.2758 per dollar today amid concern Europe’s debt crisis would worsen after a proposed bailout for Cyprus included a levy on bank deposits. PBOC adviser Song Guoqing said China doesn’t need to tighten policy as yet and there is little chance of an interest-rate increase in the first half of 2013.

“There’s too much uncertainty out there, so policy makers will prefer to be more cautious,” said Roy Teo, a currency strategist at ABN Amro Bank NV in Singapore. “When global growth picks up and there’s more clarity in Europe, China and others will be more tolerant of currency appreciation.”

Twelve-month non-deliverable forwards fell 0.06 percent to 6.3095 per dollar as of 4:53 p.m. in Hong Kong, according to data compiled by Bloomberg. The contracts traded at a 1.5 percent discount to the spot rate in Shanghai.

The yuan closed at 6.2157 per dollar in Shanghai, compared with 6.2158 yesterday, prices from the China Foreign Exchange Trade System show. It touched 6.2124 on Jan. 14, the strongest level since the government unified the official and market rates at the end of 1993. China limits the market rate to a 1 percent band on either side of the daily fixing. The currency slipped 0.04 percent to 6.2100 per dollar in Hong Kong’s offshore market.

U.S. Talks

After meeting with President Xi, Lew said the U.S. and China need to reduce trade barriers. He will meet Premier Li Keqiang tomorrow. Citigroup Inc. economist Paul Brennan said in Perth today that growth in the world’s second-largest economy will ease below 8 percent in the second half of this year.

Foreign direct investment in China climbed for the first time in nine months in February, the Ministry of Commerce said today. Inbound investment rose 6.3 percent from a year earlier to $8.21 billion.

One-month implied volatility in the onshore yuan, a measure of expected moves in the exchange rate used to price options, climbed two basis points, or 0.02 percentage point, to 1.27 percent.

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