Benchmark offshore dollar/yuan volatilities hit a four-month low on Monday as the market expected China's central bank to retain its stable yuan policy in the near term and the dollar held strong against a basket of major currencies. Benchmark one-year dollar/yuan volatilities fell as far as 4.10 percent bid at midday, down from 4.65 percent at Friday's close.
Excluding a few stray quotes over the past few months, the volatilities now imply the weakest expectation of yuan appreciation since August 12, when they also fell as far as 4.10 percent. "Now is the year-end, all the data has been published and all the conferences are finished, the central bank also has no intention of changing the exchange rate," said a dealer at a European bank in Shanghai.
"So the foreign exchange market expects the yuan may not change for now." Last week, data showed that Chinese industrial output surged in November to its fastest pace since June 2007, underlining the economy's brisk recovery from the global downturn. The data also showed a return of consumer price inflation and import growth.
Dealers said the stronger dollar was an additional factor behind the drop in yuan volatilities. The dollar index surged to a six-week high against a basket of six major currencies on Friday after the end of Asian trading hours, on speculation that the US Federal Reserve would start tightening faster than many had thought. The index retraced modestly in Monday Asian trading.
On Monday, the Chinese central bank fixed the yuan's daily mid-point, or reference rate, at 6.8279 versus the dollar, little changed from Friday's 6.8277. Spot yuan closed at 6.8282 per dollar, down slightly from 6.8276 at the close on Friday. The yuan's marginal fall of only two pips in the central bank's reference rate lagged far behind the dollar's global jump, indicating that the Chinese government has no intention of allowing the yuan to appreciate much for now.
Offshore benchmark one-year dollar/yuan non-deliverable forwards (NDFs) fell to 6.6625 bid late on Monday compared with Friday's close of 6.6745. Twelve-month yuan appreciation implied by NDFs rose to 2.48 percent, measured from the Chinese central bank's daily mid-point, compared with 2.30 percent implied at Friday's close.