Wider trading band talk grows as yuan hits record

China's yuan hit a record high for a second consecutive day on Tuesday as traders braced for the possibility the currency's trading band could be widened ahead of a key economic meeting in early November. In a marked departure from the tight ranges seen on the yuan in the past two months, the Chinese currency has been unusually volatile in the past few sessions, sparking talk that Beijing was setting the stage for further currency reforms including widening its trading band.
On Tuesday, it briefly hit a new record high of 6.1011 even though the central bank set a weaker midpoint fixing suggesting that state-run banks who usually buy dollars for the central bank in the currency market have stepped back. "There is a very small window of two weeks for the authorities to widen the trading band and signal more reforms so the market is positioning for that," said the head of trading at a US bank in Shanghai who declined to be named. China is expected to unveil concrete plans to retool its economy to rely more on investment-driven growth and less on consumption at a Communist Party Central Committee plenum in November.
The yuan's surge has confounded some market players who believe the unexpected weakness in September's exports raise fresh concerns that economic growth - which has fallen in nine of the last 10 quarters - could stumble once again just as it has shown signs of picking up. The yuan has also risen in trade-weighted terms every month since September 2012 until finally declining slightly in August but remains near a record high, data from the Bank for International Settlements (BIS) shows. BIS data for September should be released later this week.
"I must say I find it really strange," said a forex dealer at a joint-stock bank in Shanghai. "Fundamentally there's no major factor to push up the yuan. We'll have to wait for the afternoon to see if this is sustained." Leading up to the rally in the foreign exchange markets this week, Beijing has also pushed the daily midpoint fixing, narrowing the gap between the yuan's value and the daily fixing - a trend that was last seen ahead of its 2012 band widening.
The rally in the spot market also forced traders to sell dollars in the forwards market. Three-month dollar/yuan forwards also slid to a record 6.1137 before rebounding briefly. In line with speculation of the trading band, implied volatility generated from currency options on one month edged higher.