Offshore Yuan Drops as PBOC Cuts Fixing for First Time This Week

Updated on
  • Onshore yuan's volatility falls for first time in nine days
  • GDP to keep increasing 6%-7% a year: PBOC deputy governor

The yuan traded in Hong Kong fell to a one-month low as China’s central bank cut its daily fixing for the first time this week, spurring speculation it will allow the currency to drop in coming days.

The offshore yuan, which trades freely, lost 0.19 percent to 6.4036 a dollar as of 4:41 p.m. in Hong Kong, according to data compiled by Bloomberg. That’s the lowest level since Sept. 28. The People’s Bank of China weakened the reference rate by 0.07 percent to 6.3536 after raising it by 0.09 percent on Tuesday and 0.07 percent on Monday.

China’s economy will achieve annual expansion of 6 percent to 7 percent over the next three to five years, according to a transcript of a speech by PBOC Deputy Governor Yi Gang posted on its website Tuesday. The central bank cut benchmark borrowing costs for the sixth time in less than a year on Friday after official data showed gross domestic product increased 6.9 percent last quarter, the slowest pace in six years. The European Central Bank indicated last week it could expand its stimulus program this year.

The cutting of the fixing “probably influenced expectations that maybe the onshore yuan will weaken in the coming sessions,” said Christy Tan, head of markets strategy at National Australia Bank Ltd. in Hong Kong. “Everyone is still concerned about the recent policy easing in China and also the dovish statement from the ECB, so the currency will move in the direction of weakening."

Respect, Fear

Chinese authorities have moved to a more market-based system for determining the exchange rate, liberalized interest rates and extending trading hours in its onshore currency market to bolster the yuan’s case to be added to the International Monetary Fund’s reserve basket next month. The Washington-based lender has given Chinese officials strong signals in meetings that the yuan is likely to win reserve status, according to people familiar with the matter.

The yuan in Shanghai, which is restricted to moving a maximum 2 percent on either side of the fixing, declined 0.09 percent to close at 6.3592 a dollar, according to China Foreign Exchange Trade System prices. One-month implied volatility in the onshore currency, a gauge of expected fluctuations used to price options, fell for the first time in nine days, dropping two basis points to 4.31 percent.

"The PBOC wants a stable yuan before the IMF’s decision," said Tommy Xie, a Singapore-based economist at Oversea-Chinese Banking Corp. "The market respects and fears the central bank, which had intervened in onshore and offshore markets to support the currency. People don’t want to challenge the PBOC now."

— With assistance by Tian Chen

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