Yuan Volatility Rises on Political Concern as PBOC Raises Fixing

Volatility in the yuan rose from a three-week low amid concern China’s plan to protect an air zone encompassing islands that are disputed with Japan will escalate regional tensions.

China announced an air defense identification zone in the East China Sea effective Nov. 23 and said its military will take “defensive emergency measures” if aircraft enter the area without reporting flight plans or identifying themselves. Japan lodged a complaint as the U.S. and South Korea expressed concern about the action. The People’s Bank of China raised its daily yuan reference rate for the first time in three days.

“The increase in geopolitical risk over the weekend is a concern” in the currency market, said Ashley Davies, a strategist in Singapore at Commerzbank AG.

The onshore yuan’s three-month implied volatility, a measure of expected moves in the exchange rate used to price options, climbed three basis points to 1.66 percent in Hong Kong, according to data compiled by Bloomberg. It declined 24 basis points, or 0.24 percentage point, last week and touched 1.61 percent on Nov. 22, the lowest since Nov. 1.

The yuan closed little changed at 6.0926 per dollar in Shanghai, compared with 6.0936 on Nov. 22, according to China Foreign Exchange Trade System. Twelve-month non-deliverable forwards weakened 0.02 percent to 6.1350 in Hong Kong, a 1 percent discount to the onshore rate.

The central bank strengthened the yuan fixing by 0.06 percent to 6.1342 per dollar. The onshore spot is allowed to trade as much as 1 percent on either side of the gauge.

China should “gradually” expand the yuan trading band to wider than 3 percent, Financial News reported today, citing Bank of China researcher Wen Bin. It should increase the euro weightage in the basket of currency it uses to set the yuan value and reduce the U.S. dollar weighting, the report said.

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