Offshore Yuan Gains as PBOC Raises Fixing, Fed Rate Bets Recede

The offshore yuan rose for a second day as China’s central bank increased its daily reference rate by the most in a week after the dollar weakened amid data showing U.S. policy makers’ preferred measure of inflation slowing last month.

The People’s Bank of China boosted its fixing for the first time in four days, after a gauge of the dollar’s strength dropped the most in a week Monday as U.S. personal spending barely increased in February. The data spurred speculation the Federal Reserve will hold off from boosting interest rates anytime soon.

"The pressures for the Fed to raise borrowing costs have eased due to the inflation data, and that’s supporting the yuan today," said Banny Lam, Hong Kong-based co-head of research at Agricultural Bank of China International Securities Ltd., who expects the U.S. to act as soon as in June. "The yuan will likely fluctuate up and down against the greenback in the near term, and weaken after the Fed increases interest rates. But it won’t drop sharply as China’s economy will show signs of improvement at that point."

Traders put the probability of the Fed raising rates at its June meeting at 38 percent, down from 42 percent a week ago, according to data compiled by Bloomberg. A report over the weekend showed China’s industrial profits climbed for the first time in eight months in the January-February period, boosting speculation the nation’s economy may be stabilizing.

Boosting Inspections

The yuan traded in Hong Kong gained 0.07 percent to 6.5132 a dollar as of 9:39 a.m. in Hong Kong, extending its two-day advance to 0.19 percent, prices compiled by Bloomberg show. The currency in Shanghai rose 0.02 percent to 6.5095, according to China Foreign Exchange Trade System prices. The PBOC boosted its fixing, which limits onshore moves to 2 percent on either side, by 0.26 percent to 6.5060. That’s the biggest increase since March 18.

China will step up inspection and punishment of violations that interfere the currency market and sees no need to adjust individuals’ quota to buy foreign exchange, the Xinhua News Agency cited an official at the State Administration at Foreign Exchange as saying in a report Monday.

In the money markets, the PBOC injected 60 billion yuan ($9.2 billion) via seven-day reverse-repurchase agreements on Tuesday. The seven-day repurchase rate, a gauge of interbank funding availability, dropped six basis points to 2.26 percent, according to National Interbank Funding Center prices. The Yield on government notes due January 2026 rose one basis point to 2.9 percent.

To contact Bloomberg News staff for this story: Tian Chen in Beijing at tchen259@bloomberg.net. To contact the editors responsible for this story: Richard Frost at rfrost4@bloomberg.net, Allen Wan, Robin Ganguly

By: Bloomberg News

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