Yuan advances for third day as producer prices signal recovery

The yuan strengthened for a third day as the first monthly increase in China’s factory gate prices since 2013 added to signs of an improving economy and easing capital-outflow pressures.
The producer price index accelerated 0.5 percent in March versus the previous month, and narrowed its decline on a yearly basis, according to data released yesterday. Consumer inflation rose 2.3 percent from a year earlier, matching February’s pace. The figures come after data last week showed a surprise increase in the nation’s foreign-exchange reserves on reduced depreciation expectations and slower capital outflows.
“The producer price index is clearly signaling an improvement in real economic activities,” said Gao Qi, a Hong Kong-based currency strategist at Scotiabank. “A question remains on how long the recovery will sustain, but at least for now, things look bright.”
The yuan rose 0.04 percent to 6.4654 a dollar as of 12:05 p.m. in Shanghai after climbing as high as 6.4637, according to China Foreign Exchange Trade System prices. The People’s Bank of China raised the daily reference rate by 0.13 percent, the most in more than a week, to 6.4649. The currency traded offshore in Hong Kong gained 0.04 percent to 6.4761, according to data compiled by Bloomberg.
A Bloomberg replica of the CFETS RMB Index, which tracks the yuan against 13 exchange rates, fell to 97.5, the lowest level since November 2014. The official gauge, which is released on a weekly basis, dropped to 97.6 on April 8, the lowest since the CFETS began releasing the data in November. The Bloomberg Dollar Spot Index capped a second weekly retreat on Friday.
“The weakness in the yuan against the basket of currencies is mainly due to the dollar’s decline,” said Gao. “If the People’s Bank of China has to keep the yuan stable against the basket as it claims, then it has to keep the yuan’s appreciation less than other currencies.”
ING Groep NV and Commonwealth Bank of Australia, the two best forecasters in Bloomberg rankings last quarter, both expect the yuan to appreciate by year-end and predict the nation to be an anchor for its neighbors through the rest of this year, driving gains in their currencies.
The yield on government bonds due January 2026 rose one basis point to 2.91 percent, according to National Interbank Funding Center prices. The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repurchase rate, was unchanged at 2.35 percent, according to data compiled by Bloomberg.
Increasing signs of an economic rebound have prompted economists to lower their forecasts for further monetary easing, including for cuts to interest rates and lenders’ reserve requirement ratios. Australia & New Zealand Banking Group Ltd. expects the PBOC to be less aggressive in providing stimulus after yesterday’s inflation report and is now predicting only one further reduction in the reserve ratios this year, instead of three. Bloomberg