Yuan Rises to One-Month High Versus Peers on PBOC Stability Bets

  • Gain shows PBOC aiming to prevent disorderly sales, OCBC says
  • China favors quiet drift lower versus peers: Deutsche Bank

China’s yuan climbed to a one-month high against a trade-weighted index amid speculation the central bank is trying to control any fresh outburst of volatility as the dollar rebounds.

The yuan’s gain against its peers reflects China’s intention of preventing a fresh round of disorderly sales, Tommy Xie, a Singapore-based economist at Oversea-Chinese Banking Corp., wrote in a note. This comes against the backdrop of concern that the People’s Bank of China would force depreciation against the exchange rates of its trading partners to help exports even as the yuan dropped against the dollar, a strategy that Standard Chartered Plc flagged as potentially alarming markets.

A Bloomberg replica of the CFETS RMB Index rose 0.07 percent on Monday to 97.414, the highest since April 26. The yuan traded in Shanghai fell 0.06 percent to 6.5530 a dollar as of 4:38 p.m. in Shanghai, while the offshore yuan climbed 0.04 percent to 6.5618 in Hong Kong. A gauge of dollar strength declined 0.08 percent, trimming its advance for the month to 3.1 percent.

“The yuan’s direction is still depreciation, but the speed won’t be as quick as in January,” said Nathan Chow, an economist at DBS Group Holdings Ltd. in Hong Kong. "After seeing the outflows in January, policy makers became quite scared. They need to re-anchor expectations.”

The yuan recorded the longest run of declines against the greenback since December last week amid a dollar rally on rising odds of a Federal Reserve interest-rate increase in June. Traders are now placing a 28 percent chance of a move next month, compared with 4 percent a week ago, as more U.S. central bank officials spoke of the possibility of action.

The yuan index has fallen 3.5 percent this year as the PBOC took advantage of the dollar’s slump in the last three months to engineer trade-weighted depreciation while maintaining a steady dollar-yuan rate. Authorities probably favor a "quiet drift lower" in the yuan on a trade-weighted basis, Deutsche Bank AG strategists including Mallika Sachdeva wrote in a note. The lender recommends selling the yuan versus the dollar, yen and ruble. The weakness doesn’t necessarily contradict the PBOC’s commitment to basket stability, which refers more to volatility than actual levels, they wrote.

Trump Criticism

China is “absolutely killing” the U.S. by driving down the yuan’s value and making it impossible for American companies to compete, presumptive Republican presidential nominee Donald Trump said on MSNBC. His latest view, which reiterate earlier comments, come after the Treasury Department said last month that it is putting economies including China, Japan and Germany on a new currency watch list to gauge whether they provide an unfair trade advantage.

The PBOC raised the yuan’s daily reference rate, which restricts onshore moves to a maximum 2 percent on either side, by 0.08 percent to 6.5455 a dollar on Monday.

In fixed-income markets, the yield on 10-year government bonds rose one basis point to 2.96 percent, according to Chinabond data. The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repurchase rate, fell one basis point to 2.58 percent, data compiled by Bloomberg show.

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