Yuan Completes Biggest Weekly Gain Since 2011 on Trade Surplus

China’s yuan posted the biggest weekly rally since December 2011 on speculation the central bank will tolerate gains after the trade surplus widened.

The People’s Bank of China raised its daily fixing this week by the most in 2014, after the government reported the largest monthly trade excess in five years on June 8. Investors are becoming more bullish on the yuan as the central bank guides the reference rate higher in June following five months of setting it weaker, a sign it may be seeking to deter one-way bets on appreciation.

“The PBOC fixing pattern is a signal that the engineered currency depreciation could be over soon as external trade rebounds,” said Tommy Ong, executive director of treasury and markets at DBS Bank Hong Kong Ltd. “It probably also suggests the central bank has achieved its purpose in introducing more two-way moves in altering market expectations.”

The onshore yuan rose 0.63 percent this week to close at 6.2107 per dollar in Shanghai, the steepest advance since December 2011, China Foreign Exchange Trade System prices show. It climbed as much as 0.27 percent today to a two-month high of 6.2018. The currency dropped 2.5 percent this year in Asia’s worst performance.

The PBOC strengthened the fixing by 0.2 percent from June 6 and set it at 6.1503 per dollar today. The currency traded 1 percent weaker than the reference rate, the smallest discount since April.

Strategic Dialogue

The U.S.-China Strategic and Economic Dialogue will be held in Beijing in early July.

“Our view is that better economic data and international diplomacy are at play here,” Bank of America Merrill Lynch strategists including Claudio Piron in Singapore and Albert Leung in Hong Kong wrote in a research note yesterday. The stronger yuan fixings “are consistent with some stabilization in macro data,” they said.

Reports today showed China’s industrial production rose 8.8 percent in May from a year earlier, matching the median estimate in a Bloomberg News survey, compared with an 8.7 percent increase in April. Retail sales growth accelerated to 12.5 percent from 11.9 percent, which was higher than the 12.1 percent median forecast in a separate survey.

China’s trade surplus widened to $35.9 billion last month, doubling from $18.4 billion in April as exports rose and imports unexpectedly fell.

Policy Options

China’s accumulation of foreign-exchange reserves will slow as the country adjusts its economic structure with the current account becoming more balanced, Guan Tao, head of the balance of payments department at China’s State Administration of Foreign Exchange, said in an online webcast yesterday. The PBOC said on June 11 that it will expand financing channels for companies to promote exports.

The nation’s reserves, the world’s largest, rose $126.8 billion in the first quarter to a record $3.95 trillion, official figures show. The holdings were boosted by China’s current-account surplus and dollar purchases that helped weaken the yuan during the period.

“In the near term, we think there will be a slightly higher level of tolerance from officials towards appreciation,” HSBC Holdings Plc Hong Kong-based strategists led by Paul Mackel wrote in a note yesterday. The PBOC’s guidelines showed a weaker currency is a last resort to boost exports as there are other options to help the industry, the strategists said.

In Hong Kong’s offshore market, the yuan climbed 0.08 percent today to 6.2104 per dollar, data compiled by Bloomberg show. It advanced 0.55 percent this week, the biggest five-day gain since Jan. 6, 2012.

Twelve-month non-deliverable forwards rose 0.1 percent today and 0.5 percent this week to 6.2130.

One-month implied volatility in the onshore yuan, a gauge of expected moves in the exchange rate used to price options, jumped 18 basis points this week, or 0.18 percentage point, to 1.46 percent, data compiled by Bloomberg show.

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