Yuan Forwards Advance After PBOC's Fixing as Market Awaits Fed

  • Central bank strengthens reference rate by most in five weeks
  • Authorities want to damp notion they want weak yuan: analyst

Forward contracts on the yuan rose for the first time in five days after the central bank boosted its reference rate, raising bets it wants to prepare the currency for the Federal Reserve’s commentary this week.

Twelve-month non-deliverable forwards on the yuan climbed 0.16 percent to 6.6850 a dollar as of 4:48 p.m. in Shanghai after the People’s Bank of China increased the yuan’s fixing by the most in five weeks. The stronger-than-expected reference rate versus the greenback probably shows the Chinese central bank doesn’t want the market to believe it favors a weaker yuan, said Ken Cheung, a currency strategist at Mizuho Bank Ltd. in Hong Kong.

While the Federal Open Market Committee isn’t expected to raise its policy rates at the conclusion of its meeting on Wednesday, there is scope for official comments to modestly boost the market’s assessment for rate-increase prospects, according to Bank of America Corp. China’s growth has shown signs of stabilization of late, with exports, industrial output and credit expansion all beating estimates last month. The nation’s earliest economic indicators also suggest that recovery is gathering pace in April.

“The PBOC is supporting the yuan ahead of the FOMC meeting,” said Kenix Lai, a foreign-exchange analyst at Bank of East Asia Ltd. in Hong Kong. “U.S. policy makers will likely make more optimistic comments on the prospect of a rate hike as the domestic and Chinese economies improve.”

Fed officials cited deteriorating global growth and a stronger dollar in March, when they scaled back their outlook for rate increases in 2016 to two from four. Fed funds futures reflect 20 percent odds of a rate hike at the June meeting, and 34 percent by July.

The yuan traded onshore was little changed at 6.4930 to a dollar, according to China Foreign Exchange Trade System prices. The PBOC strengthened its fixing by 0.37 percent to 6.4882 on Tuesday.

A Bloomberg replica of the CFETS RMB Index, which measures the yuan against 13 exchange rates, climbed 0.15 percent, rising for a third day. It fell to a 17-month low last week, fueling speculation the PBOC prefers a weaker currency on a trade-weighted basis to aid the economy.

With Tuesday’s fixing, the central bank “wants to show it’s neutral and it’s engineering two-way fluctuations,” Cheung said.

— With assistance by Tian Chen

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