Yuan in Hong Kong Gains for Third Day as PBOC Signals Stability

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The offshore yuan advanced for a third day, extending its recovery from a record rout, as China’s central bank helped stabilize the currency following the biggest devaluation in two decades.

The currency rose 0.07 percent against the dollar as of 4:37 p.m. in Hong Kong, after tumbling 3.6 percent last week. The spot rate in Shanghai weakened 0.05 percent following a 2.9 percent weekly decline. The exchange rate will probably move in both directions as the economy stabilizes and any intervention by authorities “could be either way,” according to Ma Jun, chief economist at the People’s Bank of China.

“Ma’s comments on intervention in two directions have restored some confidence in the market,” said Eddie Cheung, a Hong Kong-based strategist at Standard Chartered Plc. “There have also been signs that the PBOC doesn’t want to see huge depreciation pressure.”

Policy makers are trying to balance the need for financial stability with a desire for stronger exports and the yuan’s inclusion in the International Monetary Fund’s basket of reserve currencies. China’s move to link the yuan’s value to market forces is an encouraging step and the currency ought to move to a free float within two to three years, Markus Rodlauer, the IMF’s mission chief to China, said Friday.

PBOC’s Fixing

The People’s Bank of China set its daily reference rate at 6.3969 per dollar and Monday’s close of 6.3947 was within 0.1 percent of the fixing. That compares with an average discount for the spot rate of about 1.5 percent over the last three months.

Under a new methodology used to determine the reference rate, market makers who submit contributing prices have to consider the previous day’s close, foreign-exchange demand and supply, as well as changes in major currency rates, the PBOC said on Tuesday. Policy makers didn’t elaborate on the central bank’s role in setting the fixing, which the yuan can diverge from by a maximum 2 percent in Shanghai.

A more market-oriented pricing mechanism for the yuan will help to avoid excessive deviation from the equilibrium level and significantly reduce the possibility of sudden fluctuations, the PBOC’s Ma said Sunday in an e-mailed statement.

The yuan sank as much as 3.7 percent to a four-year low of 6.4510 per dollar in Shanghai during the two trading sessions that followed the Tuesday morning devaluation, before rebounding as the central bank intervened and said there was no basis for depreciation to persist. The offshore rate tumbled as much as 5.7 percent.

A gauge of the yuan’s expected price swings against the dollar fell for a third day. The currency’s one-month implied volatility dropped 21 basis points to 5.3 percent on Monday, the lowest since last week’s devaluation. That compares with 1.17 percent prior to the shift in China’s exchange rate.

“Judging from the stance of the PBOC, the probability for a major yuan devaluation isn’t high,” Wei Wei, a Shanghai-based analyst at Ping An Securities Co., wrote in a note on Monday. “The yuan will likely depreciate about 3 to 4 percent in the second half amid Federal Reserve rate-hike expectations and the slowdown in China’s economy.”

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