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Yuan Declines After Best Week in Six Months as Fixing Weakened

The yuan fell, following its best week in six months, after the People’s Bank of China set the currency’s fixing at a level that prevents it from strengthening.

The PBOC cut the reference rate by 0.03 percent to 6.2415 per dollar today. That’s more than 1 percent weaker than April 19’s closing price, meaning the currency had to fall to stay within its permitted trading band. China needs to sacrifice short-term growth to make structural adjustments, central bank Governor Zhou Xiaochuan told Bloomberg News outside a meeting of the International Monetary Fund in Washington on April 20. The economy expanded 7.7 percent in the first quarter from a year, earlier, compared with 7.9 percent in the previous three months.

“The market has downsized expectations for growth recently after a weak gross domestic product print,” said Sacha Tihanyi, a currency strategist at Bank of Novia Scotia in Hong Kong. “But I am still bullish on the yuan.”

The yuan fell 0.08 percent to 6.1826 per dollar in Shanghai, according to the China Foreign Exchange Trade System. The currency gained 0.24 percent last week, the most since the period ended Oct. 14. One-month implied volatility, a measure of exchange-rate swings used to price options, fell five basis points, or 0.05 percentage point, to 1.44 percent.

The 7.7 percent growth rate in the first quarter is “overall normal” compared with the government’s 2013 target of 7.5 percent, the PBOC’s Zhou said. “China’s undergoing economic restructuring, which sometimes is not in lockstep with growth,” he said.

The death toll from an earthquake in Sichuan province, the nation’s strongest in three years, rose to 188 today, with about 11,500 injured, China Central Television reported. Bank of Novia Scotia’s Tihanyi said he didn’t expect the disaster to have any significant impact on the exchange rate.

In Hong Kong’s offshore market, the yuan traded at 6.1790 per dollar, compared with 6.1797 at the end of last week. Twelve-month non-deliverable forwards declined 0.14 percent to 6.2545. The contracts traded at a 1.1 percent discount to the spot rate in Shanghai, according to data compiled by Bloomberg.

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