Yuan Sinks to One-Month Low on Speculation of PBOC Intervention

The yuan dropped to a one-month low amid speculation the central bank intervened to weaken the currency after data indicated a pickup in capital inflows.

The People’s Bank of China reduced its reference rate by 0.01 percent to 6.1591 per dollar today, the lowest since Sept. 11. Yuan positions at Chinese financial institutions accumulated from foreign-exchange sales, a gauge of inflows, rose 189.2 billion yuan ($30.4 billion) in March following a 128.2 billion yuan increase in February that was the smallest since September, central bank data showed on April 18.

“PBOC appears to be lifting the dollar spot higher against the yuan ahead of the market close,” said Andy Ji, a Singapore-based currency strategist at Commonwealth Bank of Australia. “It’s not heavy lifting, but just keeping the spot above the fixing by at least 1 percent, which has been the case in last two weeks.”

The yuan closed 0.05 percent weaker at 6.2274 per dollar in Shanghai and earlier touched 6.2359, the lowest level since March 21, China Foreign Exchange Trading System prices show. The rate was 1.1 percent weaker than the PBOC’s fixing, within the 2 percent daily limit. The yuan has dropped 2.8 percent in 2014, the biggest loss among Asia’s 11 most-used currencies.

Hot Money

Policy makers are seeking to curb inflows of speculative capital as controls on the currency and interest rates are loosened. Dollar purchases used to check the yuan’s appreciation contributed to a $128.7 billion increase in the nation’s foreign-exchange reserves to a record $3.95 trillion in the first quarter. Japan’s reserves of $1.21 trillion are the second highest in the world.

“When we strip out the trade balance and foreign direct investment flows, the residual is our estimate of hot money flows, which came in at $10.5 billion,” said Khoon Goh, an Australia & New Zealand Banking Group Ltd. strategist in Singapore. “There was only a small change to the fixing today, but they seem intent on keeping the spot rate trading at the weak side of the band.”

China was urged in the past week by the U.S. Treasury Department, former PBOC adviser Yu Yongding and the nation’s biggest investment bank to curb the growth of its reserves by reining in yuan intervention.

Markets forces should determine the exchange rate so long as there are “controls on speculative, short-term capital flows,” Yu, the former adviser, said in an April 18 interview at a conference in Shanghai. “China can no longer bear the cost of forex reserves, so just let the yuan appreciate,” Liang Hong, vice chairman of the capital markets committee of China International Capital Corp., said at the conference. The Treasury Department’s comments were made in a semiannual report to Congress.

In the offshore market, the yuan fell 0.05 percent to 6.2279 per dollar in Hong Kong. Twelve-month non-deliverable forwards slipped 0.14 percent to 6.2610, the lowest since Aug. 15.

One-month implied volatility in the onshore yuan climbed nine basis points, or 0.09 percentage point, to 2.07 percent, according to data compiled by Bloomberg.

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