Yuan climbs to 2016 high as PBOC raises fix most in 4 months

[HONG KONG] The onshore yuan advanced to the strongest level since December after China's central bank raised its daily reference rate by the most in four months.

The magnitude of the fixing increase surprised Australia & New Zealand Banking Group Ltd, with senior currency strategist Khoon Goh putting it down largely to a euro rally and dollar decline overnight.

The European currency jumped the most since Feb 3 after central bank President Mario Draghi said he didn't see any need to cut interest rates further, while a gauge of dollar strength fell 0.54 per cent.

The yuanclimbed 0.13 per cent to 6.4993 a dollar as of 5.08 pm in Shanghai, according to China Foreign Exchange Trade System prices. It rose to 6.4866 earlier, the strongest level since Dec 29.

The offshore ratein Hong Kong gained 0.13 per cent to 6.4963. The People's Bank of China raised its fixing, which restricts onshore moves to 2 per cent on either side, by 0.34 per cent to 6.4905.

"The fixing and yuan moves reflect euro strength and dollar weakness overnight, as well as Chinese officials' anticipation for further strength in non-dollar major currencies," said Christy Tan, head of markets strategy at National Australia Bank Ltd. in Hong Kong.

"The new yuan index continued its downward drift after falling below 99 in early February, and this is in line with the authorities' aim of keeping the currency stable but allow gradual weakness against the basket."

A Bloomberg replica of the CFETS RMB Index, which was unveiled in December and measures the yuan against 13 currencies, was trading within a 99-101 range for nine weeks. It was last at 98.8 on Friday.

One-month implied volatility in the yuan, a measure of expected exchange-rate swings used to price options, rose nine basis points to 5.32 per cent, according to data compiled by Bloomberg. That's the biggest increase in a week.

The government will release key data on Saturday and PBOC Governor Zhou Xiaochuan and his top deputies will hold an annual press conference. Industrial production and fixed-asset investment are projected to show a continued slowdown, according to economists polled by Bloomberg.

EXPORTS PLUNGE

Figures released earlier this week showed a 25.4 per cent tumble in exports, illustrating the dilemma facing policy makers as they balance yuan strength with the need to boost overseas shipments. China has no incentive to depreciate the currency to boost exports, and there's no direct link between the nation's gross domestic product and its exchange rate, the PBOC's Mr Zhou said in an interview with Caixin magazine last month.

"Rising renminbi volatility may trigger concerns initially, but over time these should diminish as the markets should realise that this is a natural part of the process whereby China's currency is maturing into a more global one," Paul Mackel, head of global emerging-markets foreign-exchange research at HSBC Holdings Plc, wrote in a March 10 note.

"Foreign-exchange policy will be opportunistic, seeing 'ease then squeeze' episodes. 'Ease' when conditions are right, 'squeeze' when conditions aren't right."

BLOOMBERG