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Yuan in Hong Kong Touches Two-Week Low as Air Zone Tension Rises

The yuan in Hong Kong touched a two-week low amid rising geopolitical tensions after China imposed a new air defense zone around disputed islands, a move that was rebuffed by the U.S.

China announced an air defense identification zone in the East China Sea effective Nov. 23 and said its military will take “defensive emergency measures” if aircraft enter the area, which Japan also claims ownership of, without reporting flight plans or identifying themselves. U.S. Army Colonel Steve Warren told reporters at the Pentagon yesterday that U.S. pilots won’t comply with the order.

“While our central scenario remains for the situation to stay on the rhetorical level, the risk of actual incidents is on the rise and will make it difficult for the yuan to rise further in the offshore markets in the near term,” Dariusz Kowalczyk, a Hong Kong-based strategist at Credit Agricole CIB, wrote in a research report today.

The offshore yuan was little changed at 6.0793 per dollar as of 5:11 p.m. in Hong Kong, after touching 6.0820 earlier, the lowest since Nov. 11, data compiled by Bloomberg show. The spot rate in Shanghai was steady at 6.0927, according to China Foreign Exchange Trade System.

The People’s Bank of China cut its reference rate by 0.02 percent to 6.1357 per dollar. The onshore yuan is allowed to trade as much as 1 percent on either side of the daily fixing.

Twelve-month non-deliverable forwards rose 0.06 percent to 6.1515 per dollar in Hong Kong, a 1 percent discount to the onshore rate. One-month implied volatility in the onshore yuan, a measure of expected moves in the exchange rate used to price options, climbed one basis point, or 0.01 percentage point, to 1.53 percent, data compiled by Bloomberg show.

China will widen its yuan trading band in an “orderly fashion” and improve the exchange-rate mechanism, said PBOC Governor Zhou Xiaochuan, according to a Market News International report that cited comments made in Beijing today.

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