The premium on Chinese yuan non-deliverable forwards (NDFs) is expected to narrow next week after China gave no indication on Friday of a time frame for removing the yuan currency's peg to the dollar, US analysts said.
One-year yuan NDFs- effective trades involving thinly traded foreign currencies - were quoted at 2,480 points on Friday, pricing in an appreciation of just 2.9 percent. The yuan is effectively pegged around 8.28 to the dollar.
On the sidelines of the Group of Seven finance ministers meeting here, People's Bank of China Governor Zhou Xiaochuan said Beijing still had more work to do to prepare its financial system for a more flexible currency.
"China's forex regime could change on certain conditions, but we need to do more preparation," Zhou said.
China's statement was not a surprise to analysts, since most of them did not expect any meaningful announcement on its currency policy at the meeting.
"So far, statements from China have been benign and pretty much as expected. I would imagine, the premiums would shrink, which means the market will price in less of a move" on the yuan, said Greg Anderson, senior currency strategist at ABN Amro in Chicago.
In the run-up to G7 meetings in September 2003 and February 2004, one-year yuan NDFs had priced revaluation as high as 8 percent.
Bob Sinche, global head of foreign exchange strategy at Bank of America in New York, believes the world's seventh largest economy will go slow on its currency adjustment, citing China's high inflation.
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