Pimco Bets Dollar to Extend Advance Against Chinese Yuan

  • Changes to currency regime portend yuan losses, Pimco says
  • Investors misunderstood China's intentions: PBOC researcher Ma

Pacific Investment Management Co. says it’s betting the dollar will extend a rally against the Chinese yuan.

QuickTake The People’s Currency

China’s currency has fallen 5.5 percent against the greenback during the past six months, tumbling 1.5 percent last week in the biggest rout since August as the central bank guided it lower. An economic slowdown in China is reverberating through the currency market, weakening Australia’s dollar and boosting the yen.

“We believe the bullish trend of the U.S. dollar will remain intact and that the changes made to the Chinese currency regime portend additional scope for the yuan to weaken over the next six to 12 months,” Luke Spajic, a portfolio manager for Pimco, said in a report. “We are positioned for a stronger U.S. dollar against the yuan and a basket of other Asian emerging market currencies,” Singapore-based Spajic said.

The Chinese central bank will cut interest rates by an additional 50 basis points and reduce its reserve requirement ratio by at least 150 basis points, according to the report, after reducing both measures last year.

Market Misunderstands

Investors misunderstood the People’s Bank of China’s intentions in its recent moves on the yuan’s daily reference rate against the dollar, a central bank researcher said. Ma Jun, chief economist at the PBOC research bureau, said the fixings are based on the previous day’s closing price and changes to the basket of currencies against which the yuan is valued. Ma’s comments were posted Monday on the central bank’s website.

Downward pressure on the yuan will ease after investors absorb a shift to valuing it versus a basket of currencies and away from linking it to the dollar, Ma said.

Slowing economic growth in China has curbed demand for Australia’s commodity exports, sending the Aussie dollar down 11 percent in 2015. The currency fell for a third year, the longest run of declines since 1993. It has tumbled 3.9 percent in 2016.

Demand for the safest assets has sent the yen up 1.9 percent this year, the best performer against the dollar of 31 major currencies tracked by Bloomberg.

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