Yuan Strengthens to 19-Year High on Record Fixing, Fund Inflows

China’s yuan advanced to a 19-year high after the central bank set a record reference rate for the currency amid signs capital inflows are gathering pace.

China’s financial and capital account surplus was $101.8 billion in the first quarter, the most since 2010 and almost double the $56.1 billion reported for the same period of 2012, official data showed yesterday. The currency was at a 0.91 percent premium to the People’s Bank of China’s reference rate, which was raised by 0.15 percent to 6.2208. The spot rate is allowed to diverge from the fixing by a maximum 1 percent.

“Pressure for yuan appreciation is growing as China’s surplus jumped,” said Daniel Chan, a Hong Kong-based executive vice president at Glory Sky Global Markets Ltd. “Funds inflow has been strong and that’s boosting the exchange rate.”

The yuan rose 0.2 percent this week to close at 6.1650 per dollar in Shanghai, according to the China Foreign Exchange Trade System. It gained 0.09 percent today and touched 6.1616, the strongest level since the government unified the official and market exchange rates at the end of 1993.

The yuan appreciated 0.74 percent in April, the best month since October 2012. China will start a three-day Labour Day holiday on April 29 and trading will resume on May 2.

The U.S. Treasury is expected to label China a currency manipulator in its next semi-annual report, Tim Condon, Singapore-based head of Asia research at ING Groep NV wrote in a report today. French President Francois Hollande called on China to improve market access to narrow its trade surplus with France after a meeting in Beijing with Chinese President Xi Jinping yesterday.

Offshore Markets

Hong Kong Monetary Authority will relax yuan capital rules for local banks by scrapping a limit on net open positions and a minimum requirement for the lenders’ liquid assets in the Chinese currency, Chief Executive Norman Chan told reporters yesterday in the city. The move is positive for offshore yuan and forwards, HSBC Holdings Plc strategists Paul Mackel and Ju Wang wrote in a note yesterday.

The city had over 38,000 yuan accounts opened by non-residents at the end of February, bringing total yuan savings by non-residents to over 7 billion yuan, HKMA said in a briefing document to legislative council today.

In Hong Kong’s offshore market, the yuan climbed 0.01 percent today to 6.1665 per dollar, contributing to a 0.21 percent advance this week, according to data compiled by Bloomberg. It earlier touched a record 6.1617. Twelve-month non-deliverable forwards rose 0.06 percent to 6.2372, trading at a 1.2 percent discount to the spot rate in Shanghai. The contracts gained 0.14 percent this week.

One-month implied volatility in the onshore yuan, a measure of exchange-rate swings used to price options, declined four basis points, or 0.04 percentage point, this week to 1.45 percent.

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