China Making Most of Weak Dollar to Guide Yuan Lower, NAB Says

Updated on
  • Yuan declines to lowest level since 2014 versus basket
  • Gauge of greenback’s strength retreats for fifth day

The yuan extended declines at a 2014 low against a trade-weighted basket amid speculation the central bank was taking advantage of a sliding dollar to guide the currency weaker versus most peers.

A Bloomberg replica of the CFETS RMB Index dropped 0.2 percent against the basket that includes the yen and euro on Tuesday, taking its three-day loss to 0.6 percent. The People’s Bank of China set the reference rate 0.08 percent stronger, compared with a 0.7 percent, two-day decline in the Bloomberg Dollar Spot Index. The yuan was little changed at 6.5815 as of 4:35 p.m. in Shanghai, according to China Foreign Exchange Trade System prices.

For much of this year, the PBOC followed a dual strategy of allowing limited gains versus the dollar to combat capital outflows, and guiding depreciation against the currencies of trading partners, which helps exporters. That plan, aided by the greenback’s biggest decline since 2010 in the first quarter, was thwarted by a rebound in the dollar last month. The yuan has dropped almost 10 percent versus the basket since its August peak.

“Chinese authorities may want to unwind the strength built up in the yuan versus the basket of currencies in the last five years,” said Julian Wee, senior market strategist at National Australia Bank Ltd. in Singapore. “With the market expectation now is that the dollar index will probably strengthen in the next few months, and hence the yuan index may head up too, the Chinese authorities may be trying to positioning it lower now.”

Still, the PBOC’s overarching goal is to keep the currency stable rather than support exporters, Wee said.

The central bank said it has met with onshore lenders to discuss allowing them to trade in the offshore yuan market, according to a statement on its official microblog Tuesday, a move that would accelerate convergence between the country’s two exchange rates.

The Bloomberg Dollar Spot Index dropped 1.6 percent in the five days through Tuesday and is heading for its lowest level since May 4 as concern eased over a British exit from the European Union and traders pared bets for higher U.S. borrowing costs.

The PBOC sold 110 billion yuan ($16.7 billion) of seven-day reverse-repurchase agreements, bringing the total in the first two days this week to 280 billion yuan, the most since April, data compiled by Bloomberg show.

The 14-day repo rate, a gauge of interbank funding availability, gained three basis points to 2.78 percent, the highest since April 29, according to National Interbank Funding Center prices.

— With assistance by Helen Sun

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