Offshore Yuan Ends Seven-Day Slide as SAFE Calls Drop ‘Normal’

The yuan traded offshore snapped a seven-day slide after authorities in China described the currency’s recent decline as “normal” and said the moves shouldn’t be misinterpreted.

The yuan rose 0.24 percent, the most since May 8, to 6.1118 per dollar as of 4:47 p.m. in Hong Kong, according to data compiled by Bloomberg. It lost 1.5 percent in the last seven trading sessions. In Shanghai, the yuan rose 0.03 percent to 6.1248, rebounding from a seven-month low of 6.1351, according to China Foreign Exchange Trade System prices.

China’s economic fundamentals are sound overall and it’s unlikely there will be large-scale outflows in the future, the State Administration of Foreign Exchange said in a statement today. The volatility seen of late is normal when compared with other currencies and two-way movements in the exchange rate will be the norm, the watchdog said. Market participants shouldn’t “read too much” into the recent drop, it added.

“The statement serves to comfort the market that yuan declines won’t be excessive and investors have probably overreacted,” said Banny Lam, Hong Kong-based co-head of research at Agricultural Bank of China International Securities Ltd. “The yuan’s long-term appreciation trend is still intact.”

The People’s Bank of China cut the yuan’s fixing by 0.01 percent to 6.1192 per dollar, the weakest since Dec. 20. The spot rate was 0.1 percent lower than the fixing, after the two converged yesterday for the first time since September 2012. Twelve-month non-deliverable forwards rose 0.04 percent to 6.1500, a 0.4 percent discount to the onshore spot rate.

Panic Reaction

The “panic” market reaction to the yuan’s decline wasn’t within the PBOC’s expectations, Shen Jianguang, a Hong Kong-based economist at Mizuho Securities Asia Ltd., wrote in a note today. The slide is a stress test before further reforms are introduced, Shen said. There is downward pressure on the yuan because the PBOC is looking to introduce two-way risks and increase volatility as it curbs capital inflows and prepares for band widening, Credit Agricole CIB said in a note.

The PBOC said last 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.

Band Widening

The monetary authority is likely to widen the trading range to 2 percent between early March and early April, after the National People’s Congress that starts March 5, Australia & New Zealand Banking Group Ltd.’s Singapore-based strategists Irene Cheung and Khoon Goh wrote in a note yesterday. The band could be doubled “in the next few weeks,” Jens Nordvig, New York-based managing director of currency research at Nomura Holdings Inc., said yesterday. JPMorgan Chase & Co. said earlier this week the change will come in the next two to three months.

Chinese banks bought a net 466 billion yuan ($76 billion) of foreign currency for clients last month, compared with 201 billion yuan in December, SAFE said yesterday.

“The PBOC is behind the yuan weakness to counter hot money inflows and to tame expectations as it prepares for band widening,” said Nathan Chow, a Hong Kong-based economist at DBS Group Holdings Ltd. “Given it’s engineered by the PBOC, the drop won’t be too significant as it’s still in the control of policy makers.”

One-month implied volatility in the offshore yuan, a measure of expected moves used to price options, fell 33 basis points, or 0.33 percentage point, to 3.68 percent, according to data compiled by Bloomberg. That follows a surge of 97 basis points yesterday.