China’s Yuan Snaps Four-Day Decline as PBOC Strengthens Fixing

China’s currency snapped a four-day slide as the central bank raised the daily fixing.

The People’s Bank of China set the yuan’s daily reference rate 0.04 percent stronger at 6.1320 per dollar. Premier Li told a conference today that the country’s 7.5 percent growth target is flexible. Industrial production rose 8.6 percent in the January-February period from a year earlier, official data showed today. That compares with the median estimate for a 9.5 percent increase in a Bloomberg survey of economists.

The yuan climbed 0.15 percent to 6.1361 per dollar in Shanghai, according to China Foreign Exchange Trade System prices. It dropped 0.4 percent in the previous four days and has fallen 1.4 percent this year. The spot rate was 0.1 percent weaker than the reference rate, within the maximum allowed divergence of 1 percent.

“The PBOC fixing and the fact that the yuan has slid for several days provide some support to the currency,” said Kenix Lai, a Hong Kong-based currency analyst at Bank of East Asia Ltd. “Yet, the yuan is likely to remain weak and volatile on slower economic growth and China’s eagerness to squeeze out one-way bets on appreciation.”

Fixed-asset investment excluding rural households climbed 17.9 percent in the first two months, below the 19.4 percent forecast in a separate survey.

Exports from Asia’s largest economy slumped 18.1 percent in February, the most since 2009, official data showed March 8. The time isn’t ripe to cut banks’ reserve-requirement ratios as there isn’t a need for large-scale stimulus and the yuan depreciation trend won’t last long, according to a commentary today in the China Securities Journal.

Offshore Yuan

China combines data for industrial output, retail sales and fixed-asset investment for the first two months of the year, citing distortions from the weeklong Lunar New Year holiday, whose timing differs each year.

In Hong Kong’s offshore trading, the yuan gained 0.16 percent to 6.1345 per dollar, data compiled by Bloomberg show. It declined 0.6 percent in the previous four days and touched 6.15 yesterday, the lowest level since June.

A drop beyond the 6.15 to 6.20 per dollar range could trigger a “self-fulfilling run” weaker, Geoffrey Kendrick, Hong Kong-based head of Asian foreign-exchange and interest-rate strategy at Morgan Stanley, wrote in a research note yesterday. The bank estimates $350 billion of structured products called Target Redemption Forwards have been sold since the start of 2013, and some $150 billion remain in the market. Potential losses to holders of these products will escalate if the offshore yuan keeps weakening, according to the note.

Forwards, Volatility

Twelve-month non-deliverable forwards rose 0.18 percent to 6.1944, a 0.9 percent discount to the Shanghai spot rate. The contracts advanced as much as 0.23 percent earlier.

One-month implied volatility in the onshore yuan, a measure of expected moves in the exchange rate used to price options, fell 22 basis points, or 0.22 percentage point, to 2.14 percent, according to data compiled by Bloomberg. It touched 2.41 percent, the highest level since 2012, yesterday. A similar gauge for the offshore spot rate declined 21 basis points to 3.08 percent.

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