Yuan in Hong Kong Drops as China’s Daily Auctions Lower Rates

The yuan declined to the lowest level in more than a week in Hong Kong on speculation China’s plans to increase the frequency of money-market operations spurred demand for dollars.

Premier Wen Jiabao urged gradual yuan capital-account convertibility, China National Radio reported yesterday. The People’s Bank of China said on Jan. 18 it will start daily short-term liquidity operations, the so-called SLOs involving contracts maturing in less than seven days, as additional tools to manage cash supply.

Wen’s call complements the PBOC’s plans for more frequent money-market operations, which will reduce spikes in short-term rates and lower their average levels, said Darius Kowalczyk, a Hong Kong-based strategist at Credit Agricole CIB. “This would reduce the support for onshore and offshore yuan spot from rate differentials.”

The currency slipped 0.05 percent to 6.1980 per dollar as of 4:41 p.m. in Hong Kong’s offshore market, data compiled by Bloomberg show. It touched 6.1995, the weakest level since Jan. 10. Twelve-month non-deliverable forwards gained 0.05 percent to 6.2790, a 0.95 percent discount to the onshore spot rate.

In Shanghai, the yuan closed at 6.2198 per dollar, little changed from yesterday’s close of 6.2213, according to the China Foreign Exchange Trade System. The People’s Bank of China set the reference rate 0.01 percent weaker at 6.2796 per dollar today. The spot is allowed to trade as much as 1 percent on either side of the central bank’s fixing.

“Any correction in the Chinese foreign-exchange spot market should be viewed as a buying opportunity,” Kowalczyk said.

One-month implied volatility, a measure of expected moves in exchange rates used to price options, dropped five basis points, or 0.05 percentage point, to 1.3 percent, according to data compiled by Bloomberg.

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