Yuan’s Volatility Slides to 10-Month Low as Currency Steadies

  • Weekly ETF inflows to China, Hong Kong surge by $605 million
  • IMF, PBOC researcher say exchange rate reflects fundamentals

A gauge of swings in China’s yuan fell to a 10-month low amid receding expectations of a central bank interest-rate cut, increased emerging-market inflows and bets policy makers will limit depreciation pressures.

The currency’s one-month implied volatility, which is used to price options, dropped to 3.59 percent as of 5:10 p.m. in Shanghai, according to data compiled by Bloomberg. That’s the lowest since mid-October. In the spot market, the onshore yuan gained 0.18 percent to 6.6254 per dollar, while the currency traded in Hong Kong’s overseas market strengthened 0.21 percent.

Investors added $2.8 billion to exchange-traded funds that buy developing-nation stocks and bonds last week, with flows to China and Hong Kong growing by $605.5 million, according to data compiled by Bloomberg. While official figures showing China’s economy is slowing raise concern, yield-hunting inflows to emerging markets somewhat offset the pressure, according to Bank of Singapore foreign-exchange strategist Moh Siong Sim.

“We don’t see any factors that will lead to sharp declines in the very near term,” said Liu Jian, a Shanghai-based researcher at Bank of Communications Co. “The external environment is favoring the yuan, as the dollar has been capped in a range in recent months, while the People’s Bank of China’s efforts to stabilize market expectations also help sentiment.”

After its recent declines, the yuan remains broadly in line with fundamentals, the International Monetary Fund said in a report released on Friday. Ma Jun, chief economist at the PBOC’s research bureau, told state-run Financial News on Monday that indicators including the nation’s current-account surplus support a stable exchange rate. The excess widened to $52.3 billion in July, according to official data.

Chinese officials and state-run media have downplayed the need to lower borrowing costs, with a researcher at a State Council office saying last week that there’s no need to rush to cut interest rates or lower lenders’ reserve requirements. The PBOC said earlier that monetary easing would lead to yuan depreciation expectations and fuel speculative trades.

The central bank reference rate for the yuan was slightly stronger than expected on Tuesday, said Bank of Singapore’s Sim, adding that this may reflect the authorities’ intention to keep the currency stable until a Group of 20 Summit they are hosting in the eastern city on Hangzhou on Sept. 4-5. The PBOC raised the fixing, which limits onshore moves to 2 percent on either side, by 0.19 percent. A Bloomberg replica of the trade-weighted CFETS RMB Index, which measures the yuan against 13 currencies, fell 0.06 percent to 94.57 on Tuesday.

Higher Demand

Chinese banks sold a net 131.9 billion yuan ($19.9 billion) of foreign currency for clients in July, the most since April, data from the State Administration of Foreign Exchange released on Tuesday show. The dollar’s strength following the U.K.’s vote to leave the European Union as well as seasonal demand from individuals and companies due to summer tours and dividend payments led to the increase in foreign-exchange purchases, SAFE said in a statement.

Official data for industrial production, retail sales and fixed-asset investment released last week all fell short of estimates, while China’s broadest measure of new credit and another key gauge of lending increased at the slowest pace in two years.

The economic data have helped spur demand for the safety of government debt, with the 10-year benchmark yield falling to 2.64 percent on Monday, the lowest since Bloomberg began compiling ChinaBond data in 2006. The yield on the current notes due August 2026 rose two basis points to 2.67 percent on Tuesday, according to National Interbank Funding Center prices.

— With assistance by Helen Sun

Before it's here, it's on the Bloomberg Terminal.