Yuan Retreats From Post-Devaluation High as Gains Seen Excessive

Updated on
  • PBOC raises fixing by most in a decade after gains on Friday
  • PMI reports indicate manfacturing contracted in October

China’s yuan retreated from its strongest level since the Aug. 11 devaluation as the currency’s gains on Friday were seen as excessive and data showed manufacturing is still in decline.

The yuan weakened 0.32 percent to close at 6.3379 a dollar in Shanghai, according to China Foreign Exchange Trade System prices. It climbed 0.62 percent on Friday, the most in a decade, and traded as high as 6.3171. That prompted the People’s Bank of China to boost its yuan reference rate on Monday by 0.5 percent, also the biggest jump since July 2005 when China ended a dollar peg and said it would manage the exchange rate against a basket of currencies.

"People think Friday’s move was excessive," said Ju Wang, a Hong Kong-based senior currency strategist at HSBC Holdings Plc. "We have the view the yuan’s still facing cyclical pressure and I think that’s still the market view."

China has been supporting its exchange rate since the devaluation as it promotes greater global use of the yuan and pushes for the currency to be included in the International Monetary Fund’s Special Drawing Rights at a review this month. The yuan jumped on Friday as the central bank said it will consider a trial program allowing individuals in the Shanghai free trade zone to directly buy overseas assets and is also looking at opening up yuan-denominated bonds to trading by foreign companies.

The central bank is finalizing the revisions to its foreign-exchange rules that would loosen some capital controls while preserving its ability to intervene in times of volatility, according to people familiar with the matter.

Shrinking Output

The yuan is allowed to diverge from the PBOC’s reference rate by a maximum 2 percent in Shanghai and the methodology used to determine the fixing means it typically is set near to the previous trading day’s closing level. In Hong Kong’s offshore market, where the currency is freely traded, the exchange rate fell 0.42 percent as of 5:29 p.m. local time on Monday after strengthening 1.2 percent last week.

"The fixing is very much what should have been expected," said Sean Callow, a foreign-exchange strategist at Westpac Banking Corp. in Sydney. "But seeing the largest daily rise in the yuan since the new regime was introduced in 2005 guarantees investors will sit up and take notice."

IMF Review

Manufacturing contracted for a third month in October, according to an official purchasing managers’ index published Sunday by the National Bureau of Statistics. The gauge was at 49.8, below the 50 level that marks the dividing line between expansion and contraction. A separate PMI from Caixin Media and Markit Economics was 48.3, data showed Monday.

"The PBOC clearly wants to see a stable or stronger yuan before the IMF announces its decision on the SDR basket," said Kenix Lai, a foreign-exchange analyst at Bank of East Asia Ltd. in Hong Kong. "The central bank will probably continue to intervene in the foreign-exchange market this week to prop up the yuan, making the impact of economic data such as PMIs a less significant factor moving the currency this week."

— With assistance by Justina Lee, Tian Chen, and Fion Li

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