Yuan Three-Month Forwards Rise to Record as PBOC Pledges Changes

The yuan’s three-month forwards touched a record high after China’s central bank strengthened the daily fixing to a record and elaborated on plans to ease exchange-rate controls.

The People’s Bank of China will “basically” end normal intervention in the currency market and widen the yuan’s trading band, Governor Zhou Xiaochuan wrote in a book explaining reforms outlined at a Communist Party meeting last week. The PBOC raised the reference rate 0.02 percent to 6.1305 per dollar, the strongest since a peg to the greenback was removed in 2005. Moves in the spot rate in Shanghai are limited to 1 percent on either side.

“The market remains very positive on the Chinese yuan, especially in the offshore market,” said Irene Cheung, a Singapore-based currency strategist at Australia & New Zealand Banking Group Ltd. “The statement by the PBOC confirmed things that the market has been expecting.”

Three-month non-deliverable forwards advanced 0.1 percent to 6.1280 per dollar, a 0.6 percent discount to the onshore rate as of 5:23 p.m. in Hong Kong, according to data compiled by Bloomberg. They touched 6.1252 earlier, the strongest level on record. The 12-month contracts were steady at 6.1452.

Yuan Band

The onshore spot rate in Shanghai was little changed at 6.0929 per dollar, a 0.6 percent premium to the daily fixing, China Foreign Exchange Trade System prices show. The offshore yuan slipped 0.04 percent to 6.0670 in Hong Kong after touching a record 6.0567 yesterday, data compiled by Bloomberg show.

The yuan’s daily trading range will be widened in an “orderly way” as China seeks to enhance the currency’s two-way flexibility, Zhou wrote in the book. The nation will also phase out investment caps for both domestic and foreign investors, he said. In the U.S., Federal Reserve Chairman Ben S. Bernanke said yesterday the benchmark interest rate will probably stay low long after the bond-buying program ends.

China will broaden the yuan’s limit to 1.5 percent or 2 percent “in the next few months,” Credit Agricole CIB Hong Kong-based strategist Dariusz Kowalczyk wrote in a research note today.

The onshore yuan’s one-month implied volatility, a measure of expected moves in the exchange rate used to price options, dropped four basis points to 1.65 percent, after jumping 15 basis points yesterday, according to data compiled by Bloomberg. The measure touched 1.79 percent earlier, the highest since the beginning of July

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