Yuan Forwards Climb as Producer Prices Signal Economic Recovery

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  • Data indicating an improvement, Scotiabank strategist says
  • China's currency reserves rose in March as yuan rallied

Forward contracts on the yuan strengthened for a second day as the first monthly increase in China’s factory gate prices since 2013 added to signs of an improving economy.

The producer price index accelerated 0.5 percent in March versus the previous month, and narrowed its decline on a yearly basis, according to data released on Monday. Consumer inflation rose 2.3 percent from a year earlier, matching February’s pace. The figures come after data last week showed a surprise increase in the nation’s foreign-exchange reserves as the currency erased its declines for the year and depreciation expectations eased.

“The producer price index is clearly signaling an improvement in real economic activities,” said Gao Qi, a Hong Kong-based currency strategist at Scotiabank. “The question remains on how long the recovery will sustain, but at least for now, things look bright.”

Twelve-month non-deliverable forwards on the yuan climbed 0.12 percent to 6.6615 a dollar as of 5:15 p.m. in Hong Kong, according to prices compiled by Bloomberg. The onshore yuan fell 0.04 percent to 6.4705, paring its advance for the year to 0.34 percent, while the currency traded in Hong Kong’s offshore market was little changed at 6.4795.

Currency Basket

A Bloomberg replica of the CFETS RMB Index, which tracks the yuan against 13 exchange rates, fell to 97.5, the lowest level since November 2014. The official gauge dropped to 97.6 on April 8, the lowest since CFETS began releasing the data in November. The Bloomberg Dollar Spot Index capped a second weekly retreat on Friday.

“The weakness in the yuan against the basket of currencies is mainly due to the dollar’s decline,” said Gao. “If the People’s Bank of China has to keep the yuan stable against the basket as it claims, then it has to keep the yuan’s appreciation less than other currencies.”

The yield on government bonds due January 2026 rose one basis point to 2.91 percent, according to National Interbank Funding Center prices. The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repurchase rate, was unchanged at 2.35 percent, according to data compiled by Bloomberg.