Yuan Declines as PBOC Lowers Reference Rate Most in Four MonthsFion Li
China’s yuan fell, retreating from a 19-year high, after the central bank cut its reference rate by the most in four months and concern mounted that the global economy will face setbacks.
The People’s Bank of China lowered the yuan’s reference rate by 0.09 percent, the most since Sept. 18, to 6.2745 per dollar. The fixing was 0.97 percent weaker than yesterday’s close in Shanghai, near the 1 percent limit allowed by the central bank. The World Bank reduced its global growth forecast to 2.4 percent, from a June estimate of 3 percent, and U.S. lawmakers are discussing budget cuts. Concern about Europe’s debt crisis may pick up before Italian elections next month.
“The fixing reflects an increased demand for dollar and drags today’s spot,” said Tommy Ong, a Hong Kong-based senior vice president of treasury and markets at DBS Bank (Hong Kong) Ltd. “Investors may also want to factor in some uncertainties such as the U.S. debt ceiling and elections in Italy after a strong rally at the start of this year.”
The yuan declined 0.05 percent to close at 6.2165 per dollar in Shanghai, according to the China Foreign Exchange Trade System. The currency has climbed 0.22 percent this month and reached 6.2124 on Jan. 14, the strongest level since the government unified official and market exchange rates at the end of 1993.
The PBOC and financial institutions bought a net 134.6 billion yuan ($21.7 billion) of foreign currency in December, the largest amount in 11 months, a sign capital inflows may be strengthening. Yuan positions accumulated from foreign-exchange purchases increased to 25.9 trillion yuan.
In Hong Kong’s offshore market, the yuan slipped 0.06 percent to 6.1940 per dollar. Twelve-month non-deliverable forwards fell 0.14 percent to 6.2900 per dollar, a 1.2 percent discount to the onshore spot rate, according to data compiled by Bloomberg.
One-month implied volatility, a measure of expected moves in exchange rates used to price options, decreased 10 basis points, or 0.1 percentage point, to 1.5 percent, according to data compiled by Bloomberg.