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Yuan Declines to Two-Month Low as PBOC Weakens Reference Rate

The yuan dropped to a two-month low as China weakened the currency’s reference rate for a second day amid concern exports will be hurt by the yen’s 13 percent tumble against the dollar in the past three months.

The People’s Bank of China lowered the daily yuan fixing by 0.01 percent to 6.2821 per dollar, after setting it 0.04 percent weaker yesterday. The yen, which touched a 33-month low of 94.46 per dollar on Feb. 11, will fall to 100 by the end of the year, ING Groep NV predicted this week. The Japanese currency rose 0.5 percent today.

“Officials are still cautious on the currency with the prospect of a weaker yen,” said Daniel Chan, a Hong Kong-based executive vice president at Glory Sky Global Markets Ltd.

The yuan fell 0.03 percent to close at 6.2443 per dollar in Shanghai, prices from the China Foreign Exchange Trade System show. The currency touched 6.2454 earlier, the lowest level since Dec. 14. Spot prices are allowed to diverge a maximum 1 percent from the daily reference rate.

One-month implied volatility in the yuan, a measure of expected moves in the exchange rate used to price options, fell four basis points, or 0.04 percentage point, to 1.278 percent, according to data compiled by Bloomberg.

In Hong Kong’s offshore market, the currency slipped 0.13 percent to 6.2405 per dollar, according to data compiled by Bloomberg. Twelve-month non-deliverable forwards rose 0.09 percent to 6.3248 per dollar, a 1.3 percent discount to the onshore spot rate.

Draining Funds

The PBOC drained 30 billion yuan ($4.8 billion) from the financial system today via 28-day repurchase contracts, according to a trader at a primary dealer required to bid at the auctions. That’s the first time in eight months that the central bank took money out of the market.

Consumer prices will climb 3.1 percent this year, after a 2.65 percent increase in 2012, according to a Bloomberg survey of economists.

“A stronger exchange rate is in China’s favor as it lowers imported prices and inflationary pressure,” said Chan.

To contact the reporter on this story: Fion Li in Hong Kong at fli59@bloomberg.net

To contact the editor responsible for this story: Amit Prakash at aprakash1@bloomberg.net

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