Goldman Sachs Group Inc. and Nomura Holdings Inc. say yuan forwards are the best way to make money in Asia’s foreign-exchange market in 2011.

Goldman Sachs, Wall Street’s most profitable firm, advises buying two-year non-deliverable contracts, saying the yuan is the most likely of the region’s currencies to advance if Europe’s debt crisis spurs demand for dollars. Nomura, Japan’s biggest investment bank, favors three-month forwards, predicting China will allow appreciation to accelerate before President Hu Jintao visits Washington next month. Deutsche Bank AG also includes bets on yuan gains among its top regional trades.

A stronger yuan would help cool the fastest inflation in two years and reduce the likelihood of trade sanctions in the U.S., where China faces accusations of using an undervalued exchange rate to benefit exporters. The yuan will be the top performer among the so-called BRIC nations’ currencies in the coming year, according to analyst surveys by Bloomberg.

“The best risk-reward trade is in China because that is where we are more likely to see appreciation, even if the euro is hit by the sovereign debt crisis,” said Michael Buchanan, chief Asia-Pacific economist at Goldman Sachs in Hong Kong. “Our base line is appreciation for every currency in Asia, but any more problems in the European periphery will make it harder for Asian currencies to gain.”

Projected Gains

Nine of Asia’s 10 most-traded currencies excluding the yen weakened against the dollar in the past month as Ireland joined Greece in seeking financial aid from the European Union, and the cost of insuring bonds issued by Portugal, Spain and Italy against losses climbed to records. The yuan slid 0.4 percent to 6.6616 versus the greenback, according to data compiled by Bloomberg. South Korea’s won lost the most, sliding 2 percent.

Elsewhere in China’s credit markets, the 12-month interest- rate swap, the fixed cost needed to receive the floating seven- day repurchase rate, slid one basis point today to 3.13 percent in Shanghai as of 3:08 p.m. local time. A basis point is 0.01 percentage point.

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

China’s finance ministry sold 30.78 billion yuan ($4.2 billion) of 10-year bonds yesterday at a lower-than-forecast yield on demand from banks and insurers. The average yield was 3.77 percent, three basis points lower than the 3.80 percent median estimate of 17 traders and analysts surveyed by Bloomberg. Bids totaled 64.88 billion yuan, 2.1 times the amount sold.

Money Markets

The seven-day repurchase rate, which measures lending costs between banks, fell 31 basis points to 3.27 percent, according to the National Interbank Funding Center in Shanghai. The rate yesterday climbed 29 basis points to 3.58 percent as banks prepared to set aside extra cash to meet regulatory rules. That was the highest rate since Oct. 7, 2008.

China’s currency will strengthen 6.1 percent to 6.28 by the end of 2011, based on the median estimate of 20 analysts surveyed by Bloomberg. That’s almost triple the 2.1 percent gain projected by 12-month non-deliverable forwards. Analysts predict Brazil’s real will weaken 1.5 percent, Russia’s ruble will appreciate 1.9 percent and India’s rupee will rise 4.8 percent.

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

U.S. Legislation

President Barack Obama said Nov. 12 that the yuan was “undervalued” and he expects “progress on this issue,” while the U.S. House of Representatives has passed legislation that would make it easier for American companies to petition for higher duties on Chinese imports.

“The main appreciation will come through in the first quarter, with the January meeting between Hu and Obama,” said Craig Chan, an Asia foreign-exchange strategist at Nomura in Singapore.

The three-month non-deliverable forwards he recommends buying weakened 0.1 percent today to 6.6368, reflecting bets the yuan will strengthen 0.4 percent from the spot rate in Shanghai. He predicted the currency will gain 2.5 percent to 6.50 by the end of March and 7.1 percent to 6.22 by end-2011.

Goldman Sachs’s Buchanan forecast a 5.9 percent advance to 6.29 per dollar by the end of next year, and a further 7 percent gain in 2012. The two-year non-deliverable forwards he favors are projecting 4.4 percent appreciation for the next two years.

Peg Ended

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

China allowed the yuan to strengthen 21 percent over three years after a currency peg ended in July 2005, before halting appreciation for almost two years to help exporters weather the global financial crisis. Since 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.

Buying yuan forwards won’t necessarily prove profitable once interest costs are factored in, according to UBS AG, Switzerland’s biggest bank.

“The mistake that people tend to make with the yuan is that they think it is a one-way trade and they go long yuan and wait,” said Nizam Idris, a currency strategist at UBS in Singapore. An investor betting this way on appreciation in the forwards market in the past two years would have lost money because the cost of the trade outweighed gains, he said.

Hong Kong Forwards

Idris said he plans to rein in his prediction for the yuan to climb 7.5 percent to 6.20 per dollar next year, estimating that gains of closer to 5 percent are more likely.

Deutsche Bank, which is the world’s biggest currency trader according to Euromoney Institutional Investor Plc, forecast a 5.7 percent gain to 6.30 by the end of next year. It recommends buying the yuan using 12-month deliverable contracts in Hong Kong’s offshore market to profit as China allows faster appreciation to help tame inflation, which hit a 28-month high of 5.1 percent in November.

“Offshore yuan deliverable forwards are currently the cheapest way to access the yuan,” said Mirza Baig, a currency strategist at Deutsche Bank in Singapore. “We suggest buying yuan versus a basket against the dollar, euro and yen.”

Offshore yuan climbed 0.06 percent in Hong Kong today to 6.6500 per dollar. Twelve-month deliverable forwards in the city were steady at 6.5785, projecting 1.1 percent appreciation.

China’s leaders pledged at an annual conference this month to give greater priority to stabilizing prices in 2011 and better manage liquidity. The central bank raised borrowing costs in October for the first time since 2007 and last week increased banks’ reserve-ratio requirements for the sixth time this year.

Bloomberg