China’s Yuan Slumps Most Since 2008 as Central Bank Cuts Fixing

China’s yuan slid the most since 2008 in onshore trading after the central bank weakened the currency’s reference rate by 0.18 percent, matching a March 10 cut that was the biggest since July 2012.

The People’s Bank of China lowered the daily fixing today to 6.1460 per dollar, the lowest level since Nov. 6. The yuan has dropped 1.32 percent this month, after February’s record 1.38 percent slide amid speculation the monetary authority intervened to deter one-way appreciation bets in the currency.

“The PBOC has been very aggressive in trying to engineer short-term yuan weakness,” said Andy Ji, a currency strategist in Singapore at Commonwealth Bank of Australia. “They want to kill appreciation expectations once and for all and also to wipe out most of the speculative positioning.”

The yuan fell 0.50 percent to 6.2275 per dollar in Shanghai, the biggest drop since Dec. 1, 2008, China Foreign Exchange Trade System prices show. The currency touched 6.2334 earlier, the lowest since Feb. 25, 2013, and dropped 1.47 percent in five days. The spot rate was 1.3 percent weaker than the PBOC’s fixing, within the 2 percent trading limit that was doubled in the past week.

In offshore trading, the yuan weakened 0.3 percent to 6.2051 per dollar in Hong Kong, according to data compiled by Bloomberg. It touched 6.2093, the lowest since March 28, 2013. Twelve-month non-deliverable forwards dropped 0.18 percent to 6.2355 per dollar, trading at a 0.13 percent discount to the onshore spot rate.

Structured Products

An estimated $3.5 billion has been wiped off the value of offshore yuan structured products as China’s slowing economy and mounting credit concerns weaken the currency, according to Morgan Stanley. Losses on Target Redemption Forwards were probably around that amount at an exchange rate of 6.2 per dollar, a level breached today in Hong Kong for the first time in almost a year, the U.S. bank said in a research note today.

A yuan slide to 6.38 is probable and that would boost losses on such products to $7.5 billion, according to the note. Some $150 billion of TRFs remain outstanding, the lender said in a Feb. 26 report.

The yuan will be fully convertible within two to three years as the currency’s band widening to 2 percent is another step toward making it more market-driven, Hong Kong-based analysts including Qu Hongbin, Paul Mackel and Ju Wang at HSBC Holdings Plc wrote in a report released yesterday.

One-month implied volatility in the local currency, a gauge of expected moves in the exchange rate used to price options, increased four basis points, or 0.04 percentage point, to 2.52 percent, according to data compiled by Bloomberg.

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