Yuan Caps Longest Weekly Losing Streak This Year on Hawkish Fed

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The Good, Bad and Ugly on China's Economy
  • PBOC could intervene if depreciation is too fast, BEA says
  • Gauge of expected price swings for yuan jumps to six-week high

The yuan completed a third week of declines, the longest stretch of losses since December, as the dollar strengthened amid speculation the Federal Reserve will raise interest rates as early as June.

The Chinese currency fell 0.2 percent this week to 6.5438 a dollar as of 4:30 p.m. in Shanghai, according to China Foreign Exchange Trade System prices. The Bloomberg Dollar Spot Index gained for a third week in a row after minutes of the Fed’s April meeting showed most officials want to raise borrowing costs next month should the U.S. economy continue to improve.

A resurgent greenback is testing the People’s Bank of China’s tolerance for a weaker currency as the monetary authority said it’s trying to maintain the yuan’s stability against a basket of currencies. Speculation that the dollar could advance further on a rate increase widened the gap between the yuan’s onshore and offshore exchange rates to a three-month high and drove volatility higher.

“As the Fed minutes showed the possibility of an interest-rate increase in June is rising, the yuan inevitably came under pressure as other currencies declined,” said Kenix Lai, a Hong Kong-based foreign-exchange analyst at Bank of East Asia Ltd. “If the U.S. does raise interest rates in June, China’s capital outflows could worsen. The PBOC could again intervene should depreciation become too fast, and the rate gap onshore and offshore rises above 500 pips.”

Volatility Surges

The yuan in Shanghai gained 0.1 percent on Friday, with the gap against the offshore rate narrowing to 0.0167 -- 167 so-called pips -- after touching a three-month high of 386 on May 18. The one-month implied volatility on the onshore yuan, a gauge of expected price swings, rose as much as 23 basis points to a six-week high of 5.04 percent on Thursday, according to data compiled by Bloomberg.

A Bloomberg replica of the CFETS RMB Index, which the central bank uses to track the yuan against 13 currencies, rose 0.1 percent to 97.35 on Friday, bringing this week’s increase to the most since January.

China started to allow six offshore banks to trade spot, swaps and options in the onshore interbank currency market from Friday. This will help narrow the gap between onshore and offshore prices, according to Oversea-Chinese Banking Corp.

— With assistance by Helen Sun

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