Yuan forwards signal that traders are the most bullish on the currency in a year as the mainland economy shows signs of improvement and a US government shutdown weighs on the greenback.
Contracts that fix the currency for a month were at a 0.4 per cent discount to the spot rate in Shanghai yesterday, after reaching a one-year low of 0.3 per cent on October 4. The offshore forwards, which reflect both appreciation prospects and interest rates, rose 2.2 per cent from a low on June 24 to 6.143 per US dollar yesterday.
The outlook for gains helped drive the average yield on dim sum bonds lower for six consecutive weeks, the longest run of declines since March, a Bank of China index shows.
The mainland's service industries expanded last month by the most since March, an official report indicated last week, and economists predict data due next week will show the economy grew at the fastest pace this year in the third quarter.
The Bloomberg Dollar Index declined 0.3 per cent in the past week as a US budget dispute shut down parts of the federal government.
"People were afraid the mainland economy was terrible, but now that it has bottomed out, confidence has returned," said Frances Cheung, senior strategist at Credit Agricole CIB. "The yuan is going to be stable and maybe gain a little, which means there is a smaller need for investors to hedge risks."
Dim sum notes have risen 1.7 per cent in the past three months, compared with a 5.2 per cent decline for similar Indian securities and a 1.6 per cent drop for Indonesian notes, HSBC indices show. Asian currencies have fallen since May as the Federal Reserve said it might taper stimulus that has buoyed emerging-market assets.
The yuan's one-month implied volatility is down 48 basis points this year at 1.24 per cent. The rate on Indonesia's rupiah is 15.7 per cent and that for India's rupee is 14.7 per cent.
The yuan has gained 1.8 per cent so far this year. It is poised to end the year 0.3 per cent stronger at 6.10 against the dollar, according to the median estimate in a survey of analysts.
"Investors are not betting the yuan will gain a lot, but as long as it gradually appreciates, it's already attractive," said Credit Agricole's Cheung. "A lot of liquidity has also accumulated; the funds need to go somewhere, so there is some interest in buying dim sum bonds."
The government is targeting gross domestic product growth of 7.5 per cent this year while shifting the economy's focus from state-led investments to one in which consumer spending plays a greater role.
The country could meet its main economic targets this year, Premier Li Keqiang said in a speech late last month.
Speaking at the Asia-Pacific Economic Co-operation CEO Summit on Monday, President Xi Jinping said he was "fully confident" of the future of the economy and that China will work to make the yuan exchange rate more flexible".