Yuan Appreciation – highest in 19 years against greenback

The yuan strengthened beyond 6.21 per US dollar for the first time in 19 years yesterday after the People’s Bank of China raised the currency’s reference rate and as investors reassured by a bailout deal for Cyprus returned to emerging-market assets.

The central bank’s fixing of the yuan at 6.2692 was its strongest level against the US dollar since January 15.

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The yuan strengthened 0.02 per cent to close at 6.2107 per US dollar in Shanghai.
 A stronger exchange rate could help China tame inflationary pressures and boost domestic consumption by lowering prices of imports,” said Daniel Chan, Hong Kong-based executive vice-president of Glory Sky Global Markets. “The yuan is also hailed as a stable currency and hence has attracted some fund flows in times of uncertainty.”

The yuan strengthened 0.02 per cent to close at 6.2107 per US dollar in Shanghai. The Chinese currency traded at a 0.95 per cent premium to the reference rate, near the 1 per cent limit allowed by the PBOC.

Meanwhile, the mainland swap market is signalling interest rate increases for the first time since 2011 after inflation accelerated to a 10-month high and the housing market defied government cooling efforts.

Two-year contracts that exchange the central bank’s 3 per cent savings benchmark rate for a fixed payment rose eight basis points this month to 3.03 per cent. This means investors in these swaps expect the interest rate to rise.

The swap had been lower than the one-year PBOC deposit rate for 16 months.

Of 27 economists surveyed this month, 13 predicted higher rates this year, with Credit Agricole, Daiwa Capital Markets and Nomura forecasting two increases.

PBOC governor Zhou Xiaochuan said on March 13 that the government should be on “high alert” after consumer prices jumped a more-than-forecast 3.2 per cent in February.

Data last week showed new home prices last month posted the broadest advance since December 2011.

China’s 10-year bond yield is 0.38 of a percentage point higher than inflation, compared with a similar US real yield of minus 0.08 of a percentage point.

“The rising inflation trend and upward pressure on home prices will continue, forcing the central bank to tighten,” said Dariusz Kowalczyk, senior economist and strategist with Credit Agricole in Hong Kong. “Main lending rates will be hiked to reduce inflation expectations.”

Inflation will probably quicken to 4 per cent in the second half of the year, a level that will “really concern” the PBOC, said Kowalczyk, who accurately predicted the February consumer-price gain. He forecasts two deposit rate increases after June to 3.5 per cent, to protect returns on savings.

The central bank lowered its benchmark savings rate twice by a quarter of a percentage point last year.

Source : South China Morning Post

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