China May Widen Yuan Trading Band Within 72 Hours: UBS

China will probably widen the yuan’s trading band within the next three days after central bank Deputy Governor Yi Gang signaled policy makers will loosen control over the currency, according to UBS AG.

China may expand the range that the yuan is allowed to trade within during the Group of 20 nations meetings in Washington this week, UBS analysts Manik Narain and Geoffrey Yu wrote in a note.

Yi said during the International Monetary Fund meeting April 17 that the yuan’s trading band will be widened “in the near future.” The currency is currently allowed to trade 1 percent on either side of an official fixing. The People’s Bank of China doubled the band from 0.5 percent a year ago, the first widening since 2007.

“Signs are pretty clear that the PBOC is preparing a band widening very soon,” wrote the analysts. “As for timing, there is a risk that it happens over the course of the next 72 hours, to coincide with the G-20 meetings being held in Washington D.C. and the first anniversary of the previous widening to plus or minus 1 percent.”

The yuan has traded close to the 1 percent upper limit of the official rate for most of the time since October as China’s growing economy attracted foreign capital. The yuan closed at a 19-year high of 6.1723 per dollar April 17 before falling 0.2 percent to 6.1813 yesterday, based on China Foreign Exchange Trade System prices.

Twelve-month non-deliverable forwards on the yuan climbed 0.1 percent to 6.248 per dollar, suggesting traders expect the yuan to be little changed in a year, data compiled by Bloomberg show. The median forecast of 35 analysts surveyed by Bloomberg was for the yuan to end the year at 6.13 per dollar.

Under Pressure

“The exchange rate is going to be more market-oriented,” Yi said at the IMF conference April 17. “I think in the near future they’re going to increase the floating band even further.”

China may come under pressure to quicken appreciation of the yuan from members of the G-20 nations. A U.S. Treasury Department report last week called the currency “significantly undervalued” and asked Japan to refrain from devaluing the yen.

“China’s economy must be operating to the government’s satisfaction for them to allow band widening to happen,” the UBS analysts wrote. They advised their clients buy Chinese yuan against the Malaysian ringgit and Indian rupee.

Of 20 analysts surveyed by Bloomberg News in November, 12 forecast that the yuan’s trading band would be widened in 2013, while eight predicted that the decision would take place in 2014. Seventeen said the next change would lead to the yuan being allowed to diverge 1.5 percent to 2 percent from the reference rate.

Before it's here, it's on the Bloomberg Terminal.