Yuan Trades Near Strong End of Band on U.S. Data, Widening Bets

The yuan rose toward the strong end of its permitted trading range as a pickup in U.S. home sales boosted demand for riskier assets and on speculation China will widen the currency’s trading band this year.

Most Asian stocks gained after data yesterday showed sales of new homes in the world’s biggest economy climbed 1.5 percent last month to a 417,000 annual pace, compared with a 7.6 percent slide the previous month. China is likely to widen the yuan’s trading band against the dollar in 2013 to tighten monetary conditions, Commonwealth Bank of Australia strategists Richard Grace and Andy Ji wrote in a note yesterday. The yuan remains undervalued and will gain another 3 percent to reach 6 per dollar by end of this year, they forecast.

“Sentiment has improved as data suggests the U.S. economy is stable,” said Patrick Cheng, a foreign-exchange analyst at Haitong International Securities Co. in Hong Kong. “There’s still speculation on band widening, which translates into bets on a stronger yuan.”

The yuan gained 0.02 percent to close at 6.1781 per dollar in Shanghai, according to the China Foreign Exchange Trade System. The PBOC lowered the reference rate by 0.04 percent to 6.2384 today. The spot was at a 0.97 percent premium to the daily fixing, near the maximum 1 percent divergence allowed by the central bank.

Australian Investment

Australia’s central bank plans to invest about 5 percent of its foreign currency reserves in China as it deepens ties with the world’s second-largest economy, Deputy Governor Philip Lowe said today in Shanghai. That implies investing A$1.8 billion to A$2.4 billion ($1.9 billion to $2.5 billion) in yuan and onshore Chinese government bonds, Commonwealth Bank estimated in a research note today.

In Hong Kong’s offshore market, the yuan climbed 0.12 percent to 6.1710 per dollar, according to data compiled by Bloomberg. It touched 6.1705 earlier, the strongest in data compiled by Bloomberg going back to August 2010. Twelve-month non-deliverable forwards advanced 0.05 percent to 6.2510, trading at a 1.2 percent discount to the spot rate in Shanghai.

One-month implied volatility in the onshore yuan, a measure of exchange-rate swings used to price options, declined seven basis points, or 0.07 percentage point, to 1.32 percent.

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