Offshore Yuan Advances as ECB Disappointment Weighs on Dollar

Updated on
  • PBOC raises yuan's daily reference rate most in a month
  • China's weak fundamentals will pressure yuan, says OCBC

The offshore yuan rose as weaker-than-expected stimulus from the European Central Bank bolstered the euro and curb demand for dollars.

The ECB on Thursday cut its deposit rate and decided to extend its quantitative easing to March 2017, while maintaining the pace of monthly asset purchases at 60 billion euros ($65 billion). Two-thirds of economists in a Bloomberg survey had predicted an increase in the pace of purchases.

“Investors are disappointed by the scale of the ECB’s easing, pushing the euro stronger and the dollar weaker, and in turn supporting the yuan in the short term,” said Tommy Xie, a Singapore-based economist at Oversea-Chinese Banking Corp. “But as the market is still worried about China’s fundamentals, the yuan will face depreciation pressures in the medium to long term.”

The currency traded in Hong Kong strengthened 0.04 percent to 6.4470 a dollar as of 5 p.m., after earlier gaining as much as 0.45 percent, according to data compiled by Bloomberg. The currency erased the bulk of the day’s gains in a 15 minute period after 4 p.m.

The euro advanced 3 percent on Thursday, prompting the People’s Bank of China to raise its daily fixing by 0.2 percent to 6.3851. The yuan’s onshore rate in Shanghai weakened 0.07 percent to close at 6.4020, China Foreign Exchange Trade System prices show.

"The PBOC may be engineering a decline in the afternoon and testing if the market will start to panic if the onshore yuan weakens beyond the 6.4 levels," said Zhou Hao, a senior economist at Commerzbank AG in Singapore. "This might be the start of a new round of mild, managed depreciation of the yuan."

A gauge of manufacturing activity in China fell to the weakest level in more than three years last month, signaling that the central bank’s six interest-rate cuts since November 2014 have had limited effect and complicating Premier Li Keqiang’s efforts to achieve this year’s economic expansion target of 7 percent.

— With assistance by Tian Chen

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