Yuan Jumps to 19-Year High on Biggest Fixing Boost Since October

China’s yuan advanced to a 19-year high after the central bank raised the currency’s reference rate by the most in more than six months amid speculation U.S. monetary stimulus will spur faster gains. Volatility surged.

The yuan strengthened 0.15 percent to close at 6.1560 per dollar from April 26 in Shanghai as markets reopened after a three-day holiday, according to the China Foreign Exchange Trade System. The People’s Bank of China set the fixing 0.2 percent stronger, the most since Oct. 15, at 6.2082 per dollar.

Morgan Stanley boosted its year-end forecast for the yuan to 6.1 from 6.3 this week, citing prospects for a widening in the trading band and an increase in market participants. The Federal Reserve said it will keep buying $85 billion of bonds a month and signaled it may raise purchases should growth weaken.

“Investors are expecting China will widen the band, which means the yuan will appreciate faster,” said Daniel Chan, a Hong Kong-based executive vice president at Glory Sky Global Markets Ltd. “The dollar is likely to stay weak based on the Fed statement, which continues to drive inflows to higher-yielding currencies such as the yuan.”

The currency earlier touched 6.1537 per dollar, the strongest level since the government unified the official and market exchange rates at the end of 1993. The spot is allowed to diverge a maximum 1 percent from the daily fixing, which was set today at the highest since a dollar peg ended in July 2005.

Speculation for a change in the trading band heightened on April 18 when PBOC Deputy Governor Yi Gang said it would be widened “in the near future.” The last revision was announced on April 14, 2012, when it was doubled.

Volatility Climbs

One-month implied volatility in the onshore yuan, a measure of exchange-rate swings used to price options, rose 21 basis points, or 0.21 percentage point, to 1.68 percent. That’s the biggest increase since Dec. 13 and the highest since Jan. 14.

China’s manufacturing is showing signs of slowing. HSBC Holdings Plc and Markit Economics announced today a final April reading of 50.4 for its Purchasing Managers’ Index, compared with 51.6 for March and a preliminary reading of 50.5. The official PMI issued yesterday was 50.6 last month, compared with the 50.7 median forecast in a Bloomberg News survey and a March reading of 50.9. Levels above 50 signal expansion.

“Although China’s PMI has slowed down, it’s still relatively stable,” said Chan. “The U.S. economic rebound could be losing some steam and that will feed into a weaker dollar.”

In Hong Kong’s offshore market, the yuan rose 0.07 percent to 6.1576 per dollar, according to data compiled by Bloomberg. It earlier touched a record 6.1560. Twelve-month non-deliverable forwards climbed 0.1 percent to 6.2242, trading at a 1.1 percent discount to the spot rate in Shanghai.

Hong Kong’s yuan deposits rose to a record 668 billion yuan ($109 billion) at the end of March, the Hong Kong Monetary Authority said on April 30.

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