Yuan rises above 6.7 as talk mounts on trading band widening
There has been a spate of official comments over the past month suggesting a widening of the trading band, which analysts see as testing market readiness
Onshore yuan climbed to the highest in 10 months, breaking a key resistance 6.7 level, amid increasing talk on the potential widening of the daily currency trading band ahead of the upcoming 19th Party Congress and an expected visit to Beijing by US President Trump later this year.
The People’s Bank of China (PBOC) raised the daily reference rate by 0.07 per cent to 6.7184 on Tuesday. Currently, domestic traders are only allowed to buy or sell the currency for up to 2 per cent plus or minus of its mid-point, as market chatter emerges that the trading range will be widened to 3 per cent.
Onshore yuan rose 0.35 per cent to 6.6980 against the dollar, the strongest level since October 10. It has risen 3.63 per cent this year, along with other Asian currencies, mainly due to a weaker dollar.
Offshore yuan climbed 0.42 per cent, the most since June 27, to 6.7032.
A widening of the yuan trading band would be another step by China to signal its commitment to foreign exchange reforms, in line with its aim to internationalise the currency and to increase trading flexibility.
But such a step might be seen by some market players as symbolic only, with the central bank limiting volatility in actual trading if it desires to do so, traders and analysts said.
Nevertheless, there was less need for official foreign exchange intervention in the wake of the stable yuan sentiment and the absence of negative news, so it was a good time to widen the band, they said.
“Yuan has been trading at its strongest level since last November. This would imply that widening of the daily trading band is advantageous as it is happening during a period of CNY strength and stability,” UOB analysts including Heng Koon How said in a research note.
“It is increasingly likely that the move may be timed together with various market reforms to be announced around the upcoming 19th Party Congress, to be convened around October or November.”
A flurry of official comments suggesting the yuan trading band to be widened has been broadcast over the past month in what appeared to be tests of market readiness and reaction to such a policy move, analysts said.
Last week, the China Securities Journal said the nation needed to take advantage of temporary favourable conditions to increase yuan flexibility. PBOC Assistant Governor Zhang Xiaohui was quoted end of last month, as saying the nation should push forward exchange rate liberalisation reform.
In mid-July, PBOC advisor Huang Yiping was quoted as saying that China should further increase flexibility of the yuan and reduce intervention in the foreign exchange market. And the China Financial Daily also said the nation should further widen the trading range. Governor Zhou however, has yet to comment on the topic.
Scotiabank said in a research note that this was also a good timing to widen the trading band to affirm to the US of China’s commitment to market reforms. Foreign Minister Wang Yi was reported as confirming that preparations were underway for Trump’s official visit to Beijing later this year.