China’s Yuan Falls for Second Day as PBOC Lowers Reference Rate

China’s yuan declined for a second day as the central bank cut its daily fixing, forcing the currency to weaken to stay within the permitted trading range.

The People’s Bank of China set the reference rate 0.09 percent lower today at 6.2072 per dollar, 1.06 percent weaker than the spot rate’s close last week. The spot rate is allowed to diverge from the fixing by a maximum 1 percent. The Dollar Index was headed for the biggest three-day gain since July as Group of Seven finance chiefs indicated they will tolerate the yen’s decline. China is testing the yuan’s exchange equilibrium and may soon double its trading band, Shanghai Securities News reported today, citing people it didn’t identify.

“The weaker fixing is in line with the dollar’s rally against Asian currencies after the G-7 meetings,” said Daniel Chan, a Hong Kong-based executive vice president at Glory Sky Global Markets Ltd. “There’s still speculation on yuan band widening, and I think it’s only a matter of time before it happens.”

The yuan dropped 0.08 percent to close at 6.1468 per dollar in Shanghai, according to the China Foreign Exchange Trade System. The currency reached the upper limit of the band earlier today at 6.1455. It touched 6.1307 on May 9, the strongest level since the government unified official and market exchange rates at the end of 1993.

FDI Rules

Fixed-asset investment growth in the world’s second-largest economy unexpectedly decelerated last month while industrial output trailed estimates, official data showed today.

China will abolish 24 regulations on foreign-exchange regulations for foreign direct investment, the State Administration of Foreign Exchange said on May 11. The nation’s new local-currency loans exceeded estimates last month while money supply expanded at a faster pace, official data showed.

In Hong Kong, the yuan climbed 0.09 percent to 6.1457 per dollar, according to data compiled by Bloomberg. Twelve-month non-deliverable forwards gained 0.03 percent to 6.2270, a 1.3 percent discount to the onshore exchange rate.

One-month implied volatility in the yuan, a measure of expected moves in the exchange rate used to price options, advanced five basis points, or 0.05 percentage point, to 1.94 percent. That’s the highest level since Dec. 18.

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