Yuan volatility drops as stability seen before Xi visits US

[BEIJING] A measure of expected swings in the yuan fell for a sixth day on speculation China's central bank will counter capital outflows to keep the currency stable before President Xi Jinping visits the US.

The onshore yuan's one-month implied volatility, used to price options, fell 14 basis points to 5.32 per cent as of 4:47 pm in Hong Kong, data compiled by Bloomberg show. It has declined 95 basis points in the six days through Tuesday and dropped to a three-week low of 5.30 per cent earlier.

Yuan positions at the People's Bank of China and financial institutions fell the most on record in August and the country's foreign-exchange reserves tumbled by an unprecedented US$93.9 billion, official data show. The drops add to evidence the monetary authority intervened to support the currency as a devaluation spurred outflows. Mr Xi will visit the US later this month, the Xinhua News Agency reported.

"There's an expectation the yuan will remain stable in the next two weeks, as China probably doesn't want its financial markets to be highly volatile when Mr Xi is in the US," said Banny Lam, co-head of research at Agricultural Bank of China International Securities in Hong Kong.

"Capital outflows were significant in August due to strong depreciation expectations, but the pressure will be reduced in the next few months as China announces more stimulus measures."

The yuan, which can only move as much as 2 per cent either side of a PBOC fixing, declined 0.03 per cent to close at 6.3700 a dollar in Shanghai, according to China Foreign Exchange Trade System prices. The PBOC strengthened the currency's reference rate by 0.07 per cent to 6.3665.

Trading in the yuan was delayed in Shanghai on Tuesday and CFETS is looking into the cause, according to an official who asked not to be identified as per company policy. The first price update was 31 minutes after the regular 9:30 am daily start. The delay was due to a technical issue that was solved within half an hour, said Zhiqing Zhang, head of the trading desk at Merchants Bank Co in Shanghai.

China will allow foreign central banks and same-level institutions to directly trade in its interbank foreign-exchange market, the PBOC said in a statement Monday, without giving a timeframe. The trades will include spot currency, forwards, swaps and options, it said.

In Hong Kong, where the currency trades freely, the yuan was little changed at 6.3992 a dollar, according to data compiled by Bloomberg.

BLOOMBERG