Offshore Yuan Drops as PBOC Cuts Fix, Pimco Warns of 7% Decline

Updated on
  • Asset manager says yuan is the biggest risk to world markets
  • Pressure to build when Fed raises interest rates: Scotiabank

The offshore yuan dropped to a one-week low after China’s central bank weakened its daily fixing and Pacific Investment Management Co. said it sees further depreciation for the currency.

The People’s Bank of China lowered its reference rate by 0.33 percent, the most since Jan. 7, following an overnight advance in the dollar on comments from Federal Reserve officials on the possibility of an interest-rate increase as soon as April. The yuan, “by far the single biggest risk for the global economy and markets this year,” is expected to depreciate 7 percent against the dollar over the next year, according to a Pimco report Wednesday based on the firm’s quarterly cyclical economic forum.

"If the Fed raises interest rates in April, the dollar will rebound sharply and pressure the yuan weaker," said Gao Qi, a Hong Kong-based currency strategist at Scotiabank, who sees a June move as more likely. "We expect the yuan to depreciate modestly to 6.7 against the greenback by the end of this year" as capital leaves, the economy slows and the dollar advances.

The yuan traded in Hong Kong fell 0.22 percent to 6.5216 a dollar as of 5:33 p.m. local time, according to data compiled by Bloomberg. It dropped to 6.5219 earlier, the lowest since March 16. The onshore currency declined 0.13 percent to 6.5140, according to China Foreign Exchange Trade System prices. The Bloomberg Dollar Spot Index climbed 0.65 percent Wednesday, the most since Feb. 26.

Declining Share

The yuan’s share of global payments dropped to the lowest since October 2014, according to the Society for Worldwide Interbank Financial Telecommunications, with data affected by the one-week Lunar New Year holiday. China’s growth will likely decelerate as a trend, with mini-cycles of weak recovery and slowdown led by policy swings, Morgan Stanley economists Chetan Ahya and Elga Bartsch wrote in a note.

China won’t devalue the yuan to boost exports, and is confident that the nation’s economy will expand by more than 6.5 percent annually in the next five years, Premier Li Keqiang said in a speech in Boao, Hainan province, on Thursday. Although pressures for the yuan to depreciate do exist, the nation will be able to keep the exchange rate basically stable as long as the economy stays sound, PBOC adviser Huang Yiping said on Wednesday.

— With assistance by Tian Chen

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