Yuan Rises Against Peers as PBOC Seen Propping Up Exchange Rate

(Bloomberg) -- The yuan advanced against a trade-weighted currency basket for the fifth day in a row, the longest run of gains in more than a month, on speculation China’s central bank is propping up the exchange rate before a Group of 20 meeting.

A Bloomberg replica of the CFETS RMB Index, which tracks the yuan against 13 peers, rose 0.23 percent as of 4:53 p.m. in Shanghai on Thursday, taking its gains in the past five days to 0.6 percent. The onshore yuan was little changed at 6.6794 per dollar, while the exchange rate in Hong Kong climbed 0.03 percent. The central bank strengthened its daily fixing by 0.19 percent.

The People’s Bank of China has probably been intervening in both the onshore and offshore markets to prevent the exchange rate from weakening beyond 6.7 per dollar, according to Natixis SA. Policy makers wouldn’t want yuan fluctuations to be a hot subject during the Sept. 4-5 gathering in Hangzhou, said Gao Qi, a strategist at Scotiabank in Singapore.

"The PBOC will defend 6.7 before G-20," said Ken Cheung, a foreign-exchange strategist at Mizuho Bank Ltd. "But you will need to test that level to see if the policy will change after the meeting. Positions betting on yuan depreciation seem to be returning."

Support Speculation

The PBOC fueled speculation that it was supporting the yuan in July, setting a series of stronger reference rates after the currency weakened beyond 6.7 a dollar for the first time since 2010. The pressure on the yuan is increasing, with rising odds of a Federal Reserve interest-rate increase driving dollar strength.

In a sign of the pressure on policy makers, U.S. Treasury Secretary Jacob J. Lew said in a speech in Washington on Wednesday that the G-20 will continue to hold China to its currency commitments. Treasury Undersecretary for International Affairs Nathan Sheets said China is moving in an orderly way toward a market-oriented currency regime.

Chinese policy makers were given a reprieve on Thursday, with an official gauge of manufacturing gauge climbing to the highest in almost two years in August. A measure of the yuan’s three-month expected volatility that is used to price options rose 56 basis points in August, the most since January.

The World Bank issued 500 million Special Drawing Rights units ($698 million) of three-year notes in China’s interbank market this week, the first sale of debt in the International Monetary Fund’s alternative reserve assets since the 1980s. They were priced to yield 0.49 percent, according to Xie Duo, the secretary general at the National Association of Financial Market Institutional Investors. The yuan is set to enter the SDR on Oct. 1.

The PBOC conducted 800 million yuan ($120 million) of overnight Standing Lending Facility and 289 billion yuan of Medium-term Lending Facility operations in August, according to a statement on the monetary authority’s website.

--With assistance from Jimmy Zhu To contact the reporter on this story: Justina Lee in Hong Kong at jlee1489@bloomberg.net. To contact the editors responsible for this story: Richard Frost at rfrost4@bloomberg.net, Robin Ganguly, Allen Wan

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