Yuan Falls as Central Bank Halts Five Days of Stronger Fixings

The yuan fell the most in almost two weeks as the People’s Bank of China halted five days of strengthening the currency’s fixing amid speculation the Federal Reserve will taper its bond-buying program.

The central bank set the yuan’s reference rate 0.09 percent weaker at 6.1651 per dollar, lowering it by the most since May 13. The Bloomberg-JPMorgan Asian Dollar Index dropped for a second day before the Fed starts a two-day meeting. Currency strategists from Barclays Plc to Deutsche Bank AG are advising investors to sell the yuan, the best-performing emerging-market currency in the past six months, as growth slows in the world’s second-largest economy and inflows wane.

“We should not expect the fixing to go stronger and stronger,” said Suan Teck Kin, an economist at United Overseas Bank Ltd. in Singapore. “You don’t want to send a message of one-way appreciation for the currency. The rest of Asia is also down because of uncertainty over the Fed policy direction.”

The yuan fell 0.06 percent to 6.1285 per dollar in Shanghai, the biggest decline since June 6, according to China Foreign Exchange Trade System prices. It has rallied 1.7 percent this year and touched 6.1210 on June 3 and May 27, the strongest level since the government unified official and market exchange rates at the end of 1993.

The onshore spot rate is allowed to diverge from the fixing by a maximum 1 percent. The yuan has on average been 0.4 percent weaker than the upper limit of its permitted trading range in June, after hovering within 0.1 percent of the ceiling on most days in the previous three months.

Foreign Inflows

Foreign direct investment in China rose in May by the least in four months, official data showed today. Inbound non-financial investment increased 0.3 percent from a year earlier to $9.26 billion, after a 0.4 percent gain in April.

Yuan positions at local financial institutions accumulated from sales of foreign exchange, an indication of capital flows into China, rose 66.86 billion yuan ($10.9 billion) in May, the central bank reported June 14. That was the smallest gain since November.

In Hong Kong’s offshore market, the yuan fell 0.11 percent to 6.1343 per dollar, according to data compiled by Bloomberg. Twelve-month non-deliverable forwards dropped 0.28 percent to 6.2745, trading 2.3 percent weaker than the onshore exchange rate. The discount hasn’t been bigger since February 2009.

One-month implied volatility in the yuan, a measure of expected moves in the exchange rate used to price options, increased five basis points, or 0.05 percentage point, to 1.76 percent.

Before it's here, it's on the Bloomberg Terminal.