Yuan Drops Most Since 2010 on Speculation PBOC Wants Volatility

China’s yuan tumbled the most in more than three years on speculation the central bank wants an end to the currency’s steady appreciation to ward off speculators before a possible widening of the trading band.

The yuan fell 0.46 percent, the most since Nov. 1, 2010, to close at 6.1266 per dollar in Shanghai, according to China Foreign Exchange Trade System prices. It slid for a sixth day and reached a six-month low of 6.1310. The spot rate ended the day weaker than the central bank’s reference rate for the first time since September 2012, having been 0.77 percent stronger on average so far this year. It can diverge by a maximum 1 percent from the fixing, which was set at 6.1184 today.

The yuan has strengthened in all but three quarters since a dollar peg ended in July 2005 and its 35 percent advance against the greenback in that time is the best performance among 24 emerging-market currencies tracked by Bloomberg. Two-way capital flows will become the “new norm” for China and the exchange rate is likely to be more volatile as U.S. monetary stimulus is reined in, State Administration of Foreign Exchange said today in a report.

“The PBOC is engineering the yuan declines, which might mean the central bank wishes to change the perception of the one-way bet on yuan gains,” said Kenix Lai, a Hong Kong-based currency analyst at Bank of East Asia Ltd. “It also looks like the PBOC is introducing two-way volatility as it prepares the renminbi for a wider trading band.”

Trading Band

China may double the yuan’s trading limit to 2 percent in two to three months, JPMorgan Chase & Co. economists led by Zhu Haibin said in a note yesterday, adding that yuan declines will likely be moderate and temporary. The currency is expected to strengthen 2.6 percent in the remainder of this year, based on the median estimate in a Bloomberg survey of analysts. Mexico’s peso is the only emerging-market currency forecast to do better.

The PBOC plans to expand the yuan’s trading band in an “orderly” manner this year, it said last week. That was the first time the central bank gave such a specific timeframe for the proposed change, Credit Agricole CIB said. The yuan’s band was last widened in April 2012 from 0.5 percent, and before that from 0.3 percent in May 2007.

Chinese lawmakers will start annual meetings next week to decide on major economic policies and growth targets. The official Purchasing Managers’ Index will probably come in at 50 for February, the dividing line between expansion and contraction in manufacturing, according to the median estimate in a Bloomberg survey before data due March 1. That would be the lowest reading since September 2012.

‘Significant’ Risk

A weakening of the yuan is a “significant market risk” that may signal the economy is slowing more than indicated, Hao Hong, chief China strategist at BoCom International Holdings Ltd., said in a report today. It could also start a trade war and hurt property developers that have been borrowing funds in dollars, he wrote.

The offshore yuan fell 0.37 percent to 6.1251 per dollar in Hong Kong, reversing an earlier gain of as much as 0.17 percent, according to data compiled by Bloomberg. It has dropped 1.4 percent this month. Twelve-month non-deliverable forwards declined 0.29 percent to 6.1558, trading at a 0.5 percent discount to the onshore spot rate.

The offshore yuan’s relative-strength index climbed to a record 86 today, signaling to some traders that its drop may be overdone. The currency also broke its 200-day moving average, another technical indicator suggesting it may reverse direction.

PBOC Stance

“Compared with a few days ago, chances for a reversal only from a technical point of view look to be smaller,” said Minoru Shioiri, a Tokyo-based manager in the credit and foreign-exchange trading division at Mitsubishi UFJ Morgan Stanley Securities Co. “The move has a lot to do with the onshore fixing. So, rather than a technical story, it’s a question over whether there is any change in the central bank’s stance over the yuan.”

UBS AG said yesterday recent depreciation may suggest the People’s Bank of China is shifting away from allowing a steady pace of gains and this may lead to a reversal of “hot money” inflows.

Investors should buy the offshore yuan at 6.12 per dollar as introducing more volatility into the markets is part of the process to liberalize China’s capital account, said Jonathan Cavenagh, a Singapore-based strategist at Westpac Banking Corp.

“Where I would definitely reset my view is a move above 6.15 per dollar,” said Cavenagh. “That would potentially be a game changer because that’s where you potentially start to move to regions where some of the structured products in offshore yuan start to get stopped out. The move into the 6.15 to 6.20 range is something where I probably have to reconsider my view in a fairly meaningful way.”

Higher Volatility

One-month implied volatility in the offshore yuan, a measure of expected moves used to price options, jumped 59 basis points, or 0.59 percentage point, to 3.62 percent, according to data compiled by Bloomberg. The gauge fell 66 basis points yesterday following a 213 basis point surge last week that was the biggest since 2011.

Today marks the 10th anniversary of Hong Kong’s yuan market. The city’s banks started to offer yuan savings and credit card services to personal accounts on Feb. 25, 2004.

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