Yuan Snaps Three-Day Gain as Central Bank Fixing Forces Retreat

China’s yuan halted a three-day advance as the central bank lowered its fixing by the most in 10 months, forcing the currency to weaken to stay within the permitted trading range.

The People’s Bank of China cut the reference rate by 0.15 percent to 6.2016 per dollar today, 1.15 percent weaker than the spot rate’s closing level yesterday. The spot rate is allowed to diverge from the fixing by a maximum 1 percent. The Dollar Index jumped 1.1 percent yesterday after claims for U.S. jobless benefits unexpectedly dropped to the lowest level in more than five years. The yuan climbed to a 19-year high this week after Premier Li Keqiang pledged to announce this year a plan on capital-account convertibility.

“The yuan fixing is in reference to a basket of currencies so it falls on the dollar’s strength,” said Tommy Ong, the Hong Kong-based senior vice president of treasury at DBS Bank (Hong Kong) Ltd. “The yuan’s gradual appreciation trend is intact as China will allow more gains before the capital account is fully liberalized.”

The yuan declined 0.18 percent to close at 6.1417 per dollar in Shanghai, according to the China Foreign Exchange Trade System. That trimmed this week’s advance to 0.23 percent, an 11th week of gains. The currency touched 6.1307 yesterday, the strongest level since the government unified official and market exchange rates at the end of 1993.

RQFII Quotas

China can’t be “blindly optimistic” about its inflation outlook at a time when uncertainties remain in areas such as property and farm produce prices, the central bank said yesterday. The bank will push forward interest-rate liberalization and reform of the exchange-rate mechanism, it said. Consumer prices climbed 2.4 percent from a year earlier in April, more than March’s 2.1 percent gain and within the official 3.5 percent inflation goal for this year.

China Asset Management Co. and CSOP Asset Management Co. said they won a combined 4 billion yuan ($651 million) of investment quotas under the Renminbi Qualified Foreign Institutional Investor program this week. China is on course to allocate the whole 200 billion yuan RQFII quota, Z-Ben Advisors, a Shanghai-based consultancy, said in a note yesterday.

“Granting out new RQFII quota shows that China’s intent to open its capital account is genuine,” said DBS Bank’s Ong. “That could further boost demand for the yuan.”

In Hong Kong, the yuan dropped 0.16 percent to 6.1444 per dollar, according to data compiled by Bloomberg. It rose 0.17 percent this week in a sixth straight weekly gain. Twelve-month non-deliverable forwards fell 0.3 percent today, paring this week’s gain to 0.07 percent. The contracts traded at 6.2190, a 1.2 percent discount to the onshore exchange rate.

One-month implied volatility in the yuan, a measure of expected moves in the exchange rate used to price options, climbed 29 basis points, or 0.29 percentage point, to 1.89 percent this week. That’s the highest level since Dec. 18.

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