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Investors should buy three-month non-deliverable yuan forwards as capital inflows led by a widening trade surplus will prevent China from slowing currency appreciation, according to Goldman Sachs.
Offshore traders have pared bets since mid-July on how far the yuan will strengthen in the next three months on speculation policy makers will step up efforts to bolster the economy, Bloomberg News said. The currency depreciated 0.05 percent versus the dollar in August, the first monthly loss in more than two years, adding to concern China will halt gains to protect exports.
"The yuan's non-deliverable forwards look very attractive now," currency strategists at the securities firm wrote in a research note. China won't shift its currency policy as there's "continued strong foreign-exchange inflows led by continued large trade surpluses."
The yuan climbed 0.14 percent to 6.8264 a dollar as of 4:41pm in Shanghai, from 6.8350 last week, according to the China Foreign Exchange Trade System.
Non-deliverable forwards contracts show the currency will rise 0.24 percent to 6.81 in the next three months, compared with a stronger prediction of 6.7095 on July 18. Forwards are agreements in which assets are bought and sold at current prices for future delivery.
China's trade surplus unexpectedly widened 4 percent to US$25.3 billion in July from a year earlier, the first gain in four months. The local currency may also appreciate against the dollar because of "intensifying political pressure" from the United States as presidential candidate Barack Obama recently suggested that China should be singled out as a currency "manipulator," Goldman said in its research report.
US Labor Secretary Elaine Chao said on August 26 that the Bush administration will keep urging China to accelerate yuan gains to help close a trade deficit that ballooned to US$256 billion in 2007. A stronger currency would make China's exports more expensive, reducing demand.
China has managed the yuan's exchange rate against a basket of currencies including the euro, the yen and the British pound since July 2005.
The Chinese currency gained 8.2 percent against the pound and 6 percent against the euro last month.
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