Yuan Gap Evaporates as PBOC Cuts Interventions: Chart of the Day

China’s yuan is trading at the smallest discount to its fixing since the trading band was doubled in March, indicating the monetary authority has cut the scale of its interventions, says Commonwealth Bank of Australia.

The CHART OF THE DAY shows the spread has narrowed to 0.1 percent, and the yuan is poised to reach parity with the central bank’s reference rate for the first time since March. The discount was as much as 1.6 percent on April 29, the most since the People’s Bank of China increased the trading range to 2 percent on March 17. The central bank engineered a decline in the currency this year to deter speculators who had taken its appreciation for granted.

“The narrowing shows the PBOC has scaled back its intervention,” said Andy Ji, a Singapore-based foreign-exchange strategist at CBA. “It may even allow a spot trading premium to the reference to project two-way moves, although a persistent and significant premium is unlikely in coming months.”

Yuan positions at Chinese financial institutions from foreign-exchange purchases, a barometer of capital flows, fell by 88.3 billion yuan ($14 billion) in June. Declines are a sign of outflows, and this was the first drop in 11 months.

The PBOC is intervening less because “hot money inflows” have abated, said Nathan Chow, a Hong Kong-based economist at DBS Group Holdings Ltd. The yuan spot is moving closer to the reference rate also because of improved sentiment toward China’s economic fundamentals, Ji said.

The nation’s gross domestic product increased 7.5 percent from a year earlier in the April-June period, after a 7.4 percent gain in the previous three months, official data show. Citigroup raised its full-year growth forecast to 7.5 percent from 7.3 percent, while JPMorgan revised its estimate to 7.3 percent from 7.2 percent. The yuan, which has trimmed its 2014 loss to 1.9 percent, closed at 6.1747 per dollar yesterday.

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