China’s yuan surged to its strongest level in 17 years on speculation policymakers will tolerate appreciation to stem capital outflows.
The currency advanced for a second day as the central bank set the reference rate 0.07 percent higher at 6.3167 per US dollar.
“The fixing shows the central bank’s determination to push forward with appreciation,” said Liu Dongliang (劉棟樑), a Shenzhen-based senior analyst at China Merchants Bank Co (招商銀行). “The market has fully taken the signals sent through the fixings.”
The yuan strengthened 0.26 percent to 6.3198 per US dollar as of 4:30pm in Shanghai, according to the China Foreign Exchange Trade System. It touched 6.3160 earlier yesterday, the strongest level since the country unified the official and market exchange rates at the end of 1993.
Twelve-month non--deliverable forwards traded at 6.3815 yuan, from 6.3835 on Friday. The contracts traded at a 0.97 percent discount to the onshore spot rate, according to data compiled by Bloomberg. Hong Kong’s offshore market was closed for a public holiday yesterday.
A depreciation of the yuan may fuel outflows of capital, Yi Xianrong (易憲容), a researcher at the Institute of Finance and Banking that is affiliated to the Chinese Academy of Social Sciences, wrote in a commentary in the China Daily yesterday.
Almost US$28 billion of hot money flowed out of China last month, Chen Lan and Jiang Chao, analysts at Guotai Junan Securities Co (國泰君安證券), wrote in a report released on Sunday. Global risk aversion may continue to drive speculative capital out of the nation “in the short term,” they wrote.
The money-market rate jumped to the highest level in more than four weeks on speculation banks are hoarding cash to meet end-of-year capital requirements and ahead of the Chinese New Year that falls on Jan. 23.
“There is strong demand for cash as the year-end draws near,” said Wang Huane, a bond analyst at Qilu Bank Co (齊魯銀行) in Shandong Province.
“Cash demand will be even higher next month before the Lunar New Year holiday,” Wang said.
The New Taiwan dollar is on the verge of overtaking the yuan as Asia’s best carry-trade target given its lower risk of interest-rate and currency volatility. A strategy of borrowing the New Taiwan dollar to invest in higher-yielding alternatives has generated the second-highest return over the past month among Asian currencies behind the yuan, based on the Sharpe ratio that measures risk-adjusted relative returns. The New Taiwan dollar may soon replace its Chinese peer as the region’s favored carry trade tool, analysts say, citing Beijing’s efforts to support the yuan that can create wild swings in borrowing costs. In contrast,
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