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Yuan forecast to maintain mild strengthening

TAIPEI, Taiwan -- In light of the People's Bank of China's decision to expand the trading band of the yuan against the U.S. dollar from 1 percent to 2 percent, Standard Charter Bank (渣打銀行) yesterday stated that volatility for the currency is not expected to surge dramatically.

Standard Chartered yesterday also stated that it stands by its previous forecast of the yuan's movement over the course of this year, adding that the yuan may reach 5.92 against the dollar by the fourth quarter of this year.

According to the bank's latest report, the yuan may see a rebound in strength in the short term, with volatility expected to grow more tepid in the intermediate to medium term. Standard Chartered, however, stated that the Chinese central bank's decision represents its resolve in proclaiming the end of the yuan's era of one-sided appreciation, and maintain the currency's exchange rate at an appropriate, balanced and stable level.

Standard Chartered analyst Lo Min-chin (羅銘勤) stated that the Chinese central bank's decision was in line with expectations, and had been hinted about numerous times in previous public announcements in recent years. Lo however, stated that the doubling of the yuan's trading band is indicative of the central bank's tremendous resolve.

According to Lo, in the numerous weeks leading to the Chinese central bank's announcement on Monday, the movement of the middle rate of the yuan against the dollar — the halfway price between the bid and ask quote offered by dealers, had been progressing congruently with the spot rate. In addition, the yuan's domestic and offshore exchange rates had seen widespread decline during this period, Lo said. Lo indicated that these developments represent the central bank's intent to establish a new trading regime, as opposed to a reflection of China's stagnating macroeconomic growth rate. Therefore, with the exception of small downward adjustments to the yuan's expected rate of appreciation in the short-term, Standard Chartered stands by its previous analysis of the yuan's strength over 2014, stating that it expects the currency to reach 6 against the greenback in the fourth quarter of this year.

Lo added there was a similar lack of heightened volatility following the central bank's announcement to raise the yuan's trading band against the dollar in April of 2012. There is little chance that volatility will meet the newly expanded limits, said Lo, adding that possible declines in the U.S. dollar will help in maintaining the value of the yuan by slowing the pace in offloading offshore renminbi deposits.

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