Yuan storms to record high; c.bank yields to appreciation pressure

Business & Markets 2013
Written by Reuters
Thursday, 25 April 2013 17:59
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* Yuan up hits record high of 6.1694 in afternoon trade
* C.bank seen laying groundwork for band widening
* Capital account surplus rose massively in Q1
* Bullish yuan sentiment at 20-month high--poll
By Gabriel Wildau
SHANGHAI, April 25 (Reuters) - China's yuan galloped to a
record high on Thursday after the central bank set its midpoint
at the strongest level ever, in a sign that traders interpreted
as possible preparation for a widening of the currency's trading
band.
Spot yuan closed at 6.1707 per dollar after
reaching a record intra-day high of 6.1694 in afternoon trade.
The slightly softer closing level still surpassed the previous
intraday record of 6.1723 hit last Wednesday.
The spot rate's gain closely matched the corresponding gain
in the central bank's daily midpoint, which came after the
dollar index fell overnight. The euro rose
against the dollar on optimism that Italy will resolve its
political deadlock.
Though China's central bank has traditionally set stronger
yuan midpoints in response to declines in the dollar
index, the correlation has weakened this year.
Still, traders say the People's Bank of China (PBOC) may
have returned to this traditional pattern opportunistically on
Thursday, seeing a chance to guide the yuan higher.
After initially expressing scepticism, traders have now
increasingly come to expect that the PBOC will announce a
widening of the yuan's daily trading band in the weeks or months
ahead.
They say that the series of strong midpoints this month,
which created space for the spot rate to reach a series of
record highs, is likely an attempt by the central bank to
release some appreciation pressure in advance of widening the
band.
Data released Thursday highlighted the upward pressure on
the Chinese currency that regulators are facing.
China posted a capital and financial account surplus
of $101.8 billion in the first quarter this year.
That was a massive increase from the $20.0 billion surplus in
the fourth quarter last year and the $16.8 billion deficit for
full-year 2012.
The current account surplus also rose, hitting
$55.2 billion in the first quarter compared to $45.1 billion in
the fourth quarter last year.
A Reuters poll released on Thursday also showed that bullish
sentiment on the yuan reached a 20-month high in the last two
weeks.
RELEASING PRESSURE
The PBOC currently allows the spot exchange rate
to rise or fall by no more than 1 percent from the midpoint it
sets each morning.
But the spot rate has consistently hovered near the very top
end of the band since late 2012, indicating that market forces
would push the yuan stronger were it not for the 1 percent
limit.
The central bank is keen to avoid a scenario in which the
yuan strengthens abruptly immediately following the band
widening. By guiding the spot rate stronger in recent weeks,
authorities appear to be trying to ensure a smooth transition.
A robust trade surplus, increasing yuan appreciation
expectations by onshore corporates involved in trade, and signs
of hot money inflows are all contributing to market pressure for
appreciation.