Yuan Has Best Week in Six Months on PBOC’s Band-Widening Signals

China’s currency had the biggest weekly gain in six months and yuan forwards rose to a record after the central bank signaled plans to widen a trading band that’s been limiting appreciation since October.

The yuan gained 0.24 percent to close at 6.1776 per dollar in Shanghai, the upper end of its permitted trading range and within 0.1 percent of a 19-year high of 6.1723 reached on April 17, according to China Foreign Exchange Trade System prices. It is allowed to move a maximum 1 percent from the People’s Bank of China’s reference rate, which was strengthened 0.03 percent today to 6.2395. The currency rose 0.06 percent from yesterday.

The band is likely to be increased “in the near future,” PBOC Deputy Governor Yi Gang said April 17 in Washington, where finance chiefs from the Group of 20 nations are meeting to discuss exchange-rate policies. The last expansion took effect on April 16, 2012 and UBS AG said the next move may be announced by Sunday to coincide with the first anniversary as well as the G-20 talks. JPMorgan Chase & Co. said a revision is more likely in 2014.

“It’s not a good time to widen the trading band given that capital inflows are big and pressure is on the appreciation side,” Zhu Haibin, JPMorgan’s chief China economist, said yesterday in an interview in Shanghai. “If you widen the trading band now, it will trigger more capital inflows and people would expect further appreciation.”

Capital Inflows

Yuan positions at Chinese financial institutions stemming from foreign-exchange transactions, a gauge of cross-border capital flows, climbed 295 billion yuan ($48 billion) in February, central bank data show. Gains are a sign of inflows and January’s 684 billion yuan increase was a record.

The currency has appreciated 0.9 percent this year and been within 0.1 percent of the upper end of its permitted trading range most days since October. PBOC’s Yi told reporters that the exchange rate will become “more market-oriented” and current conditions are suitable for a broadening of the trading range to be considered.

“There is a high chance that band widening will occur sometime this year, but I do not think it will be imminent,” said Khoon Goh, a senior strategist at Australia & New Zealand Banking Group Ltd. in Singapore. “The yuan is trading close to the strong side of the band, and to widen the band now would simply send the yuan quickly towards the new strong side, effectively a re-valuation. A more opportune time would be when the yuan is trading closer towards the midpoint.”

Yuan Forwards

The spot rate has reached the strong end of its trading range frequently in the past six months and last tested the lower limit in July 2012. Twelve-month yuan forwards rose for a fourth week, the longest winning streak since January 2012, and touched 6.2420 today, the strongest level in data going back to 1998. The contracts gained 0.22 percent since April 12 to 6.2440 per dollar in Hong Kong, according to data compiled by Bloomberg.

Last year’s change to the band saw the maximum allowed fluctuation from the reference rate doubled to 1 percent. The move was announced on the central bank’s website on Saturday, April 14 and took effect when trading resumed on the Monday. The previous revision was from 0.3 percent in May 2007.

“Signs are pretty clear that the PBOC is preparing a band widening very soon,” UBS analysts Manik Narain and Geoffrey Yu wrote in a research note. Yu said in an email to Bloomberg that he saw a one-in-three chance for the move this weekend. They recommended their clients buy the yuan against Malaysia’s ringgit and the Indian rupee to profit from such a move.

Band Survey

Of 20 analysts surveyed by Bloomberg News in November, 12 forecast the yuan’s trading band would be widened in 2013, while eight predicted it 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.

The PBOC scrapped a decade-old peg of 8.3 per dollar in July 2005 and the currency has since strengthened 34 percent. It kept the yuan near 6.83 for about two years through June 2010 as the global financial crisis battered overseas sales.

The yuan should be kept stable to support exports, Wang Xuekun, deputy head of the policy research office at China’s Ministry of Commerce, said today in Beijing. Shipments rose 10 percent from a year earlier in March, the least in four months, official data show.

U.S. Treasury Secretary Jacob J. Lew this week reiterated that China needs to allow further yuan appreciation. The currency rose 1 percent against the dollar in 2012 following a 4.7 percent advance in 2011. This year’s gain will be 1.8 percent, based on the median estimate of analysts surveyed by Bloomberg.

China’s foreign-exchange reserves, the world’s largest, increased by $128 billion to a record $3.44 trillion in the first quarter of this year, official data show. Lew urged G-20 officials to follow through on a pledge to refrain from influencing exchange rates at the expense of other countries.

“Reserves growth has picked back up, which indicates capital inflow pressure has returned,” said Jonathan Cavenagh, a currency strategist at Westpac Banking Corp. in Singapore. Band widening would “definitely be a positive step,” he said.

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