Yuan Declines From 19-Year High as PBOC Fixing Forces a Retreat

China’s yuan fell from a 19-year high as the central bank lowered its fixing, forcing the currency to weaken to stay within a set trading range.

The People’s Bank of China cut the daily reference rate by 0.05 percent to 6.2578 per dollar, 1.02 percent below the spot rate’s closing level yesterday. The yuan is allowed to trade 1 percent either side of the fixing. Foreign-exchange reserves increased to $3.44 trillion as of the end of March, higher than the $3.36 trillion median estimate in a Bloomberg News survey, official data showed today.

“The weaker fixing is a breather for the yuan after it posted a new high yesterday,” said Kenix Lai, a Hong Kong-based foreign-exchange analyst at Bank of East Asia Ltd. “The appreciation trend is still intact for the yuan as funds continue to flow into Asia, including China, in a hunt for higher-yielding assets.”

The yuan weakened 0.04 percent to close at 6.1963 per dollar in Shanghai, prices from the China Foreign Exchange Trade System show. The spot rate was at a 0.99 percent premium to today’s fixing. The currency touched 6.1923 yesterday, the strongest level since the government unified official and market exchange rates at the end of 1993.

China reported an unexpected trade deficit of $880 million in March, the first since February 2012, which may send a powerful signal that a strong yuan can no longer be tolerated, Australia & New Zealand Banking Group Ltd. economists Liu Li-Gang and Zhou Hao wrote in a research note yesterday.

Offshore Market

Yuan positions at Chinese banks from the sale of foreign exchange climbed 295 billion yuan ($48 billion) in February from a month ago, the PBOC said yesterday. Total positions rose to 26.8 trillion yuan, the highest since Bloomberg began compiling the data in February 2000.

China started direct trading between the yuan and Australian dollar yesterday, making it the third major currency to have transactions without going through the U.S. dollar. Trade amounted to A$250 million ($263 million) on the first day today, Australian Prime Minister Julia Gillard said in an interview.

Reserve Bank of Australia Governor Glenn Stevens said the yuan will eventually become the dominant currency in Asia. Liberalization of China’s capital account will presumably continue to occur but on a timetable decided by the Chinese authorities, Stevens told a symposium in Sydney yesterday.

In Hong Kong’s offshore market, the Chinese currency slipped 0.02 percent to 6.1878 per dollar, data compiled by Bloomberg show. Twelve-month non-deliverable forwards fell 0.04 percent to 6.2632, trading at a 1.1 percent discount to the spot rate in Shanghai.

One-month implied volatility in the onshore yuan, a measure of expected moves in the exchange rate used to price options, was steady at 1.42 percent.

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