Yuan Forwards Decline a Second Day as PBOC Cuts Reference Rate

Yuan forwards dropped for a second day after the central bank lowered the currency’s reference rate for the first time in more than a week as the dollar extended gains against some of the world’s major currencies.

The People’s Bank of China cut the daily fixing 0.06 percent to 6.1705 against the U.S. currency, ending the longest run of increases since November. The PBOC added funds to the financial system via an issue of 11 billion yuan ($1.8 billion) of seven-day reverse-repurchase agreements today, according to a statement on its website.

“The yuan weakens as onshore liquidity has become less tight and as the dollar rebounds,” said Stella Lee, president of Success Wealth Management Ltd. in Hong Kong. “It’s still a negative on Chinese exports if the yuan is too strong.”

Twelve-month non-deliverable forwards fell 0.06 percent to 6.2655 against the greenback as of 4:42 p.m. in Hong Kong, according to data compiled by Bloomberg. The contracts traded at a 2.3 percent discount to the spot rate in Shanghai, which closed at 6.1217 from yesterday’s 6.1223, according to China Foreign Exchange Trade System prices.

The spot reached 6.1143 on Aug. 8, the strongest level since the government unified the official and market exchange rates at the end of 1993. The yuan has advanced 1.8 percent against the dollar this year, the best performance among Asia’s 11 most-traded currencies tracked by Bloomberg.

The Bloomberg U.S. Dollar Index, which tracks 10 of the world’s major currencies, has gained 0.7 percent in two days on speculation a pickup in U.S. data, such as retail sales and manufacturing due this week, will bolster the case for the Federal Reserve to scale back asset purchases.

In Hong Kong’s offshore market, the yuan traded at 6.1197 per dollar, compared with 6.1205 yesterday, according to data compiled by Bloomberg. One-month implied volatility in the onshore yuan, a measure of expected moves in the exchange rate used to price options, dropped four basis points, or 0.04 percentage point, to 1.18 percent. The gauge touched 1.16 percent, the lowest level since October.

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