Is a big China currency move in the works?

July 30, 2016

By Dhara Ranasinghe, CNBC

Not for the first time this year, talk that China could widen the trading band for the yuan is doing the rounds with some analysts saying a move could come as early as this weekend.

China's decision a week ago to scrap the floor on lending rates for commercial banks, as it takes another step towards opening up its financial markets, makes other reform measures such as widening the yuan's trading band and establishing a new interest-rate framework more likely, say analysts at Credit Agricole.

"[One]message coming from the lending floor removal is that the currency regime will soon be liberalized as well," analysts at Credit Agricole said in a note published on Wednesday.

"The last time that the dollar/yuan trading band was widened in April 2012, the move was announced not too far from the timing of rate liberalization," they added.

The Chinese yuan, also known as the renminbi, is currently allowed to rise or fall by 1 percent in either direction from a level fixed against the dollar each day by the country's central bank.

"We expect another dollar/yuan band widening, to plus or minus 1.5 percent or plus and minus 2 percent around the fixing, in the very near future – most likely in Q3 and quite possibly this or next weekend," said the Credit Agricole analysts.

It is not unusual for Beijing to make big announcements regarding the economy late on a Friday or over the weekend and analysts said they would not be surprised by an imminent change in the yuan's trading band.

"The widening of the yuan trading band is part of China liberalizing its markets and the talk does crop up from time to time – I have heard it in the last few days," said Chris Weston, chief market strategist at trading firm IG.

The yuan traded at about 6.1330 per dollar on Friday. It had been on a strengthening trend for much of the first half of the year but has weakened a touch amid signs of weakness in the Chinese economy and broad-based strength in the US dollar.

Currency strategists say that while trade in the yuan was a one-way bet for a long time, this is no longer the case.

"In the mini stimulus measures announced by China this week, what was also suggested was that the currency would not be allowed to appreciate to an extent that it would hurt exports," said Vishnu Varathan, market economist at Mizuho Corporate Bank.

Beijing unveiled a series of steps this week to support a weakening economy. The measures included scraping taxes for small firms and encouraging banks to lend to exporters.

"Given that the yuan hasn't been strengthening at the pace that it was a couple of months back, it may be a better time to widen the band as a move would not be misinterpreted as a sign that China wants to allow greater appreciation," he added. "So in terms of timing, the winds are shifting in favor of a yuan move."