China Set to Widen RMB/U.S. Dollar Trading Band

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Jun. 9 – Standard Chartered Bank has stated it expects Beijing to widen the RMB daily trading band against the U.S. dollar to help with its inflation battle, triggering a rise in daily trade volatility and long bets on the currency.

Currency analysts Callum Henderson and Robert Minikin of Standard Chartered Bank put the case forward earlier this week, while a government official at China’s State Administration of Foreign Exchange (SAFE) has also spoken out in favor of greater flexibility in the RMB exchange rate. Guan Tao, head of SAFE’s balance of payments department, expressed the view that China should expand its capital outflow channels while gradually expanding the RMB-dollar trading band.

StanChart expects the People’s Bank of China (PBoC), the country’s central bank, to widen the RMB to U.S. dollar daily trading band from +/-0.5 percent to +/-1.0 percent within a matter of weeks. This would come just a year after the RMB was de-pegged from the U.S. dollar in mid-June 2010, but more than three years since the last move was made to widen the trading band from +/-0.3 percent in May 2008.

Henderson told AsianInvestor that widening the band would send a strong signal and would have two implications.

“One, it would give China greater capacity to offset inflationary risks,” he says. “Second, as Chinese authorities are conscious of the fact that there is enormous interest in holding long RMB positions, this measure would enable China to introduce more two-way volatility into the RMB.”

Fighting inflation has been a top priority in Beijing for the past 12 months. Despite four interest-rate hikes since October, the country’s CPI still stood at 5.3 percent in April. That is expected to accelerate to 5.5 percent in May, according to a median forecast of economists in a Bloomberg survey.

“The exchange rate can have an impact on inflation for China, but the impact is not going to be sufficient [on its own],” StanChart said. “Therefore, we haven’t changed our view of the rate profile in China and still expect to see one more rate hike from the PBoC this year.”

StanChart has suggested appreciation of up to RMB6.2 per U.S. dollar, with stop loss at RMB6.44 per U.S. dollar.