PBOC keeps yuan traders guessing as currency rallies
Recent gains after five months of declines attest to policymakers' new norm of valuation swings, with central bank tweaks adding to volatility
Mainland policymakers have been saying since February that two-way swings in the yuan are the "new norm". A surprise surge in the currency shows that they mean it.
Twelve-month non-deliverable forwards, which traders use to speculate or hedge, strengthened 0.9 per cent against the US dollar this week, their biggest advance since January 2012.
The rally follows five months of declines that investors attributed to an effort by the People's Bank of China to weaken the yuan and fend off speculators who were anticipating a continuation of a five-year rally.
Looking ahead, we see the currency to remain at the current level
Just as traders got used to a declining yuan in recent months, the currency changed direction again after the government reported the mainland's trade surplus almost doubled and the central bank set the reference exchange rate yesterday at the strongest level since March.
The PBOC's efforts to inject volatility and reduce speculation are gaining traction as currency strategists from Barclays to Westpac Banking disagree on whether the yuan's strength can last.
"The move is more about mixing it up and increasing volatility, just as they said they would," said Edmund Harriss, investment director at Guinness Atkinson Asset Management. "I see the yuan continuing to trade that way."
The PBOC raised its yuan fixing by 0.42 per cent to 6.1451 per US dollar in the past three days, including a 0.22 per cent increase on Monday that was the biggest since October 2012. The spot rate, which is allowed to fluctuate 2 per cent above or below the official quote, rose 0.14 per cent yesterday to 6.2315 in Shanghai, China Foreign Exchange Trade System prices show.
The yuan has lost 2.9 per cent this year, the worst performance among major Asian currencies. It started to slide after it hit a two-decade high in January as the central bank warned that it may take measures such as imposing taxes to prevent speculative money from flowing into the country.