Yuan Volatility Drops to Five-Month Low Amid Signs of Stability

  • ``Worst is behind us for now,'' CBA strategist Andy Ji says
  • Cost of one-year swaps rises to highest level since November

A measure of expected swings in the yuan fell to a five-month low as the currency stabilized and data indicated that Asia’s biggest economy is recovering from the slowest growth in 25 years.

Traders who use the volatility gauge to price options aren’t seeing the kind of weakening they had bet on and may be cutting losses, according to Cliff Tan, head of global markets research at Bank of Tokyo-Mitsubishi UFJ Ltd. The yuan, which recorded its worst-ever start to a year this January, has now wiped out 2016’s losses. The economy is showing signs of a rebound as well, with data on factory-gate prices, foreign-exchange reserves and manufacturing activity all coming in higher than forecast.

One-month implied volatility for the yuan dropped 35 basis points, the most in a month, to 4.15 percent as of 5:59 p.m. in Shanghai, according to data compiled by Bloomberg. The currency traded onshore fell 0.05 percent to 6.4615, according to China Foreign Exchange Trade System prices. It declined 0.02 percent to 6.4703 in Hong Kong’s offshore market.

“Recent economic data suggest the worst is behind us for now after a series of monetary and fiscal stimulus packages,” said Andy Ji, a Singapore-based foreign exchange strategist and economist at Commonwealth Bank of Australia. “Looking ahead, the pick up in growth activity may further boost sentiment on the yuan.”

The government this month outlined a package of measures including railway spending and tax relief to help create jobs and support the economy, expanding on plans to speed up construction projects, while the central bank has ensured banks have access to funds if they want to lend. Premier Li Keqiang was cited as saying by China Central Television that the nation will promote supply-side reforms to ensure growth is in a reasonable range even as he flagged downward pressures.

The PBOC raised the yuan’s daily reference rate by 0.05 percent to 6.4616 a dollar after the Bloomberg Dollar Spot Index slumped to its lowest level in more than nine months on Monday. A Bloomberg replica of the CFETS RMB Index, which tracks the yuan against 13 exchange rates, fell to 97.4.

The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repurchase rate, rose three basis points to a four-month high of 2.38 percent, according to data compiled by Bloomberg. The seven-day repo rate, a gauge of interbank liquidity, climbed four basis points to 2.31 percent, according to National Interbank Funding Center prices.

The central bank auctioned 60 billion yuan ($9.3 billion) of seven-day reverse-repurchase agreements Tuesday, matching the amount of such contracts maturing.

— With assistance by Helen Sun

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