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Yuan Forwards Weaken as Central Bank Lowers Reference Rate

July 25 (Bloomberg) -- Yuan forwards fell after the central bank lowered the reference rate by the most in a week.

The State Council yesterday approved tax breaks for small companies and reduced fees for exporters after a report by HSBC Holdings Plc and Markit Economics indicated a manufacturing slowdown worsened in July. The People’s Bank of China weakened the reference rate by 0.1 percent to 6.1759 per dollar. The Bloomberg Dollar Index, which tracks the greenback against 10 major currencies, rose 0.5 percent yesterday after data showed new home sales in the U.S. increased to a five-year high in June.

Twelve-month non-deliverable forwards dropped 0.14 percent to 6.2815 as of 4:57 p.m. in Hong Kong, trading at a 2.3 percent discount to the onshore spot rate, which rose 0.02 percent to 6.1347, China Foreign Exchange Trade System prices showed. The currency is allowed to diverge a maximum 1 percent from the central bank’s fixing. The yuan has appreciated 1.6 percent this year, the only gainer among Asia’s 11 most-traded currencies.

“The dollar is rebounding and usually the PBOC’s fixing follows the dollar index move,” said Ju Wang, a Hong Kong-based strategist at HSBC. “We think the policy bias is for a stable renminbi but they probably don’t mind a small depreciation just to help the export sector.” HSBC predicts the yuan will drop to 6.16 by year-end, Wang said.

Foreign direct investment in China will be little changed from last year, Cao Hongying, an official with the foreign investment department of the Ministry of Commerce, said in Beijing today. Investment has increased 4.9 percent to $61.98 billion in the first six months of 2013 from a year earlier, official data show.

In Hong Kong’s offshore market, the yuan fell 0.04 percent to 6.1371 per dollar, data compiled by Bloomberg show. One-month implied volatility in the onshore yuan, a measure of expected moves in the exchange rate used to price options, increased two basis points, or 0.02 percentage point, to 1.5 percent.

The yuan climbed two places to No. 11 for transactions in the global payments system with a record 0.87 percent market share in June, according to a statement from the Society for Worldwide Interbank Financial Telecommunication yesterday. The currency overtook Thailand’s baht and the Norwegian Krone.

To contact the reporter on this story: Lilian Karunungan in Singapore at lkarunungan@bloomberg.net

To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net

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