Offshore yuan drops most in 15 months as China probes inflows

‘Dynamic’ Equilibrium

One-month implied volatility in the yuan, a measure of expected moves in the exchange rate used to price options, declined five basis points, or 0.05 percentage point, to 1.56%. It jumped 18 basis points last week, the biggest increase since the five days ended Jan. 11.

The debate over the yuan’s exchange rate should focus on the mechanism by which the currency’s level is set, not its actual valuation, China’s official Xinhua News Agency wrote in an unsigned commentary on May 3. The goal should be on “perfecting” the mechanism to guide the yuan to a “dynamic” equilibrium, Xinhua wrote.

The yuan will gain 0.8% in the rest of the year to 6.12 per dollar by end of December, according to the median forecast of analysts in a Bloomberg News survey.

The regulatory change is prompting market participants to rein in bets on yuan appreciation and this may last for a few days, said Cliff Tan, East Asian head of global markets research at Bank of Tokyo-Mitsubishi UFJ Ltd. in Hong Kong.

“But long-term direction has to do with fundamental valuations and cyclical needs,” he said. “Going forward, it still makes sense for Chinese authorities to have a slow appreciation crawl in terms of the onshore fixing, so spot appreciation is also still on the cards.”

Bloomberg News

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