Yuan forwards are valued in Asia 2011 Best bets on Goldman, Nomura

Goldman Sachs Group Inc. and Nomura Holdings Inc. said before the yuan is the best way to make money in the Asian market currency in 2011.

Goldman Sachs, the most profitable firm on Wall Street, recommended the purchase of contracts without delivery of two years, saying that the yuan is the most likely of the currencies of the region to move forward if the debt crisis of Europe boosts dollar demand . Nomura, the largest Japanese investment bank favors past three months, the prediction of appreciation will accelerate China before President Hu Jintao visits Washington next month. Deutsche Bank AG, also includes betting on yuan gains from their regional operations from the top.

A stronger yuan could help cool the fastest inflation in two years and reduce the possibility of trade sanctions in the U.S., where China faces charges of using an undervalued exchange rate for the benefit of exporters. The yuan will be the best performer among the currencies of BRIC countries in the next year, according to analyst surveys by us.

"The best risk-reward is in China, because that's where we are more likely to see appreciation, even if the euro is affected by the crisis of sovereign debt," said Michael Buchanan, chief economist for Asia and the Pacific Goldman Sachs in Hong Kong. "Our baseline is the appreciation of the currency in Asia, but Europe's periphery problems make it harder for Asian currencies to gain."

The projected gains

Nine out of 10 in Asia the most actively traded currencies except the yen weakened against the dollar in the last month that Greece joined Ireland in search of financial aid from the European Union, and the cost of insuring bonds issued by Portugal, Spain and Italy against losses rose to records. The yuan slipped 0.4 percent to 6.6616 against the dollar, according to data compiled by us. South Korean won has lost most, sliding 2 percent.

Elsewhere in credit markets of China, the interest rate swap for 12 months, the fixed cost required to receive the floating rate repurchase seven days, slipped one basis point to 3.13 percent today from Shanghai as of 15:08 local time. A basis point is 0.01 percentage point.

The government bond yield 3.29 percent, due September 2020 fell three basis points to 3.84 percent, the lowest level in six weeks, the National Interbank Funding Data Center show.

Ministry of Finance of China sold 30.78 billion yuan (4.2 billion) of bonds in 10 years yesterday, performance below expected demand for banks and insurers. The average yield was 3.77 percent, three basis points below the median estimate of 3.80 percent of 17 traders and analysts surveyed by us. Tenders totaled 64.88 billion yuan, 2.1 times the amount sold.

Money Market

The repurchase rate seven days, which measures the cost of loans between banks, fell 31 basis points to 3.27 percent, according to the National Centre in Shanghai interbank funding. The index rose 29 basis points yesterday, up 3.58 percent as banks willing to set aside extra money to meet regulatory standards. That was the highest since October 7, 2008.

China's currency strengthened 6.1 percent to 6.28 by the end of 2011, based on the median estimate of 20 analysts surveyed by us. That's nearly triple the 2.1 percent gain projected by the non-deliverable 12 months. Analysts predict that the Brazilian real will weaken 1.5 percent, Russian ruble appreciated by 1.9 percent and the rupee in India will increase by 4.8 percent.

Chinese Vice Premier Wang Qishan discussed currencies with U.S. Treasury Secretary Timothy F. Geithner, two days ago in Washington, which last week urged in a letter sent by U.S. senators to allow the yuan "to appreciate significantly" before Hu's visit next month.

U.S. Legislation

President Barack Obama said November 12 that the yuan was "undervalued" and he hopes that "progress on this issue," while the U.S. House of Representatives has passed a law that would make it easier for U.S. companies to petition for higher duties on Chinese imports.

"The main assessment will come through in the first quarter, with the January meeting between Hu and Obama," said Craig Chan, currency strategist at Nomura Asia in Singapore.

The front three months without delivery today recommends buying weakened 0.1 percent to 6.6368, reflecting the betting the yuan will strengthen to 0.4 percent of the spot rate in Shanghai. He predicted that the currency will benefit 2.5 percent to 6.50 in late March and 07/01 to 06/22 percent by the end of 2011.

Goldman Sachs Buchanan percent forecast an improvement from 5.9 to 6.29 per dollar by the end of next year, and another 7 percent gain in 2012. The front of two years is not for delivery are projecting 4.4 percent appreciation over the next two years.

Pin-ended

Forwards are agreements to buy and sell assets at current prices for delivery at a future time and date certain. Non-deliverable contracts are settled in dollars.

China allowed the yuan to strengthen to 21 percent over three years after a fixed exchange rate ended in July 2005 prior to stop the appreciation of almost two years to help exporters from the global financial crisis. From the People's Bank of China pledged to allow greater exchange rate "flexibility" in June, the yuan has risen 2.5 percent against the dollar.

Purchase later yuan not necessarily be profitable, once interest costs are taken into account, according to UBS AG, Switzerland's largest bank.

"The mistake that people tend to do with the yuan is that I think is a one-way trade and go far yuan and wait," said Nizam Idris, a currency strategist at UBS in Singapore. An investor betting in this way in the appreciation in market forward over the past two years have lost money because the cost of trade outweigh the gains, he said.

Hong Kong Front

Idris said he plans to control his prediction that the yuan to rise by 7.5 per cent to 6.20 per dollar next year, estimating that earnings of about 5 percent is more likely.

Deutsche Bank, which is the world's biggest currency trader according to Euromoney Institutional Investor Plc, predicted a gain from 5.7 to 6.30 percent by late next year. Consider buying the yuan through delivery contracts of 12 months in the offshore market in Hong Kong to profit as China allows a faster appreciation to help tame inflation, which reached a maximum of 28 months from 5.1 percent in November.

"Offshore yuan before delivery are currently the cheapest way to access the yuan," said Mirza Baig, a currency strategist at Deutsche Bank in Singapore. "We suggest buying yuan against a basket against the dollar, the euro and the yen."

Offshore yuan rose 0.06 percent in Hong Kong today at 6.6500 per dollar. Twelve-month forward delivery in the city remained at 6.5785, with a projected 1.1 percent appreciation.

China's leaders pledged at an annual conference this month to give greater priority to price stabilization in 2011 and improved management of liquidity. The central bank raised borrowing costs in October for the first time since 2007 and last week increased needs of banks-reserve ratio for the sixth time this year.