Yuan Forwards Snap Two-Day Gain on China PMI Data, Fed Tapering

Yuan forwards snapped a two-day gain after the Federal Reserve cut stimulus for the second time in as many months and as a private report showed China’s manufacturing contracted for the first time since July.

The Purchasing Managers’ Index was at 49.5 in January, from December’s 50.5, according to data released today by HSBC Holdings Plc and Markit Economics. A reading below 50 indicates contraction. The Federal Open Market Committee said yesterday it will trim monthly bond purchases by $10 billion to $65 billion from February, after a similar reduction in January. Markets in China will be shut for the week-long Lunar New Year holiday starting tomorrow.

“A weak PMI weighs on investor sentiment and the fear over an economic slowdown seems more intense in markets outside China,” said Ho Man Chun, an economist and strategist at Bank of Communications Co.’s Hong Kong branch. “The Fed’s tapering also has some limited impact on the yuan. Yet, government policy remains the key to the direction of the currency.”

Twelve-month non-deliverable yuan forwards declined 0.09 percent to 6.1235 per dollar as of 4:39 p.m. in Hong Kong, a 1 percent discount to the onshore spot rate, according to data compiled by Bloomberg. The yuan in Shanghai fell 0.08 percent to 6.0600, China Foreign Exchange Trade System prices show. It weakened 0.18 percent this week and 0.1 percent in January.

The People’s Bank of China raised the reference rate by 0.04 percent to 6.1050 per dollar today. The spot rate was 0.7 percent stronger than the fixing, near the 1 percent limit.

China’s official Purchasing Managers’ Index was at 50.5 for January, compared with last month’s 51, according to the median estimate in a Bloomberg survey before data due Feb. 1.

The offshore yuan slipped 0.09 percent to 6.0350 per dollar, paring this week’s advance to 0.13 percent, data compiled by Bloomberg showed. One-month implied volatility in the onshore yuan, a measure of expected moves in the exchange rate used to price options, dropped three basis points, or 0.03 percentage point, today to 1.22 percent.

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