Offshore Yuan Slides in Worst Week Since 2011 on Growth Concerns

The yuan had its biggest weekly slide since September 2011 in offshore trading after China manufacturing data added to signs of a slowdown in the world’s second-largest economy.

The yuan dropped 0.27 percent today to 6.0847 per dollar as of 4:40 p.m. in Hong Kong, extending this week’s loss to 0.81 percent, based on data compiled by Bloomberg. The currency fell

0.13 percent to close at 6.0914 in Shanghai, according to China Foreign Exchange Trade System prices, after the People’s Bank of China cut the daily reference rate by 0.05 percent to a two-month low of 6.1176. The offshore yuan is the worst performer in February among 12 Asian exchange rates tracked by Bloomberg.

China’s manufacturing is contracting at the fastest pace in seven months, according to a preliminary purchasing managers’ index released yesterday, and economists predict gross domestic product will climb this year at the slowest pace since 1990. The yuan has risen 36 percent against the dollar since a peg ended in July 2005, the best performance among 24 emerging-market currencies, and Bloomberg surveys indicate it will lead Asia gains through year-end.

“The PMI is helping to scale back renminbi appreciation expectations,” said Paul Mackel, Hong Kong-based head of Asian currency research at HSBC Holdings Plc. “I’d expect offshore yuan profit-taking to extend.”

Global yuan trading volume surged to $120 billion a day on average in April 2013, from $34 billion in 2010, according to a Bank for International Settlements survey. Daily average turnover in offshore yuan spot, forwards and options could reach $20 billion in 2014, based on a December estimate by Deutsche Bank AG, the world’s biggest currency trader.

Trading Band

The People’s Bank of China said this week it plans to expand the yuan’s trading band in an “orderly” manner in 2014, while broadening cross-border usage of the currency. The onshore spot rate can currently diverge a maximum 1 percent from the daily fixing, a limit that was expanded in April 2012 from 0.5 percent, and before that from 0.3 percent in May 2007.

The spot rate in Shanghai was 0.43 percent stronger than the central bank’s reference rate today, the smallest premium since October. The premium climbed as high as 0.97 percent in January, the biggest gap since May.

The yuan squeeze “appears to be engineered by the People’s Bank of China, according to Mirza Baig, head of foreign exchange and interest rates strategy at BNP Paribas SA in Singapore. The drop could signal the central bank is taking the two-way flexibility of exchange rate seriously, or as a precursor to band-widening before the National People’s Congress next month, Baig said.

Gains Forecast

Lawmakers will hold annual meetings from the first week of March to decide on major policies and economic targets. GDP will increase 7.5 percent this year, according to the median estimate in a Bloomberg survey. The yuan is forecast to strengthen 2.2 percent in the remainder of 2014, based on a separate poll.

‘‘What’s important to remember is that an outright devaluation of the renminbi, or a depreciation trend is not in PBOC’s interest,” said Baig. “It would spring a new shock on the economy by raising the short-term cost of capital in the interbank market, and deal a blow to its agenda of internationalizing the renminbi.”

The offshore yuan’s premium to the onshore spot rate tightened to 0.12 percent, down from this year’s high of 0.6 percent on Feb. 7, according to data compiled by Bloomberg. The gap has significantly narrowed, suggesting limited room for further declines in the currency in offshore trading, HSBC Hong Kong-based strategist Ju Wang wrote in a note today.

Volatility Surge

The exchange rate is likely to experience more volatility in the first half, China Securities Journal said in a front-page commentary written by reporter Ren Xiao. The currency isn’t entering into a depreciation trend, the paper said, adding that the yuan will get support from China’s stable growth and an economic recovery in developed nations.

One-month implied volatility for the offshore yuan surged 95 basis points, or 0.95 percentage points today, to 3.13 percent, according to data compiled by Bloomberg. That’s the highest level since December 2012. The gauge, a measure of expected moves in the exchange rate used to price options, reached 8.93 percent in September 2011, when a deteriorating outlook for the global economy spurred demand for dollars.

Twelve-month non-deliverable forwards fell 0.04 percent today to 6.1315 per dollar, according to data compiled by Bloomberg. The contracts traded at a 0.7 percent discount to the onshore spot rate.

The offshore yuan’s 14-day relative-strength index fell to 22 today. Readings below 30 indicate a turnaround is likely. The comparable gauge for the spot rate in Shanghai was also 22.

“The onshore and offshore yuan spots are in oversold territory and markets should stabilize at these levels later today,” said Dariusz Kowalczyk, a Hong Kong-based strategist at Credit Agricole CIB. “The outlook depends on speculation regarding yuan band widening, which is a key driver of spot weakness. Going into the weekend, players will want to stay short yuan spot on such speculation.”