Yuan Gains, Snapping 2-Day Drop, on Speculation of Band Widening

China’s yuan strengthened, erasing a weekly loss, on speculation that the government will widen the currency’s trading band.

The yuan’s trading band should be widened and capital-account convertibility accelerated, according to a front-page commentary in the China Securities Journal. Capital Economics is “deeply sceptical” of the view that the yuan has to weaken to reach its market value, economists Mark Williams and Qinwei Wang wrote in a note, saying the currency will rise to 6.1 per dollar by the end of 2013 and climb further to 6 at end-2014.

“The authorities are committed to moving to a more market-based exchange rate, including a further widening of the exchange-rate band,” Tim Condon, head of Asian research at ING Groep NV in Singapore, wrote in a report today.

The yuan rose 0.06 percent to 6.1379 per dollar in Shanghai, trimming this week’s loss to 0.01 percent, China Foreign Exchange Trade System prices show. That followed a drop of 0.08 percent the previous week. The currency has strengthened 1.5 percent this year, making it the only gainer in Asia.

PBOC Fixing

The People’s Bank of China cut its yuan reference rate on four of five days this week, lowering it to 6.1751 per dollar today, 0.2 percent less than on July 12. The spot rate is allowed to diverge a maximum 1 percent from the fixing.

The International Monetary Fund said July 17 there is an increasing risk that China’s 2013 economic growth will fall short of the fund’s 7.75 percent forecast. Asia’s largest economy expanded 7.5 percent in the second quarter from a year earlier, official data showed this week, slowing from a 7.7 percent gain in the preceding three months and 7.9 percent in the final quarter of 2012.

In Hong Kong’s offshore market, the yuan rose 0.07 percent today and this week to 6.1358 per dollar, data compiled by Bloomberg show. Twelve-month non-deliverable forwards advanced 0.04 percent today and 0.18 percent this week to 6.2775, a 2.2 percent discount to the onshore spot rate.

One-month implied volatility in the onshore yuan, a measure of expected moves in the exchange rate used to price options, dropped 14 basis points this week and rose one basis point today to 1.56 percent.

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