Yuan Posts Biggest Two-Day Loss Since 2008, Nears Band Limit

China’s yuan posted the biggest two-day loss since 2008 and sank to a record discount to the central bank’s reference rate, nearing the limit of its trading band.

The spot rate traded as much as 1.89 percent weaker than the People’s Bank of China’s fixing against the dollar and a move to the 2 percent threshold would under the current system require policy makers to do one of three things: intervene to support the yuan, cut the reference rate or widen the band. Volatility is surging as the PBOC gives markets a greater role in determining the exchange rate at a time when monetary easing in Europe and Japan are bolstering demand for the greenback.

The yuan slid 0.41 percent to close at 6.2542 a dollar in Shanghai, after dropping 0.31 percent on Friday, according to prices from China Foreign Exchange Trade System. Against the euro, the yuan rose as much as 1.4 percent to a 13-year high of 6.9685 after a weekend election in Greece boosted the possibility of the country leaving the 19-nation currency.

“Haven demand for the dollar is strong with the uncertainty in Greece and Europe’s monetary easing,” said Daniel Chan, a Hong Kong-based analyst at Brilliant & Bright Investment Consultancy Ltd. “It’s going to be some hard times for the yuan as China will keep monetary policy relatively loose to ensure economic growth, which means more supply of the local currency.”

The Bloomberg Dollar Spot Index jumped to the highest since at least 2005 and the euro slumped to an 11-year low against the U.S. currency. The European Central Bank announced last week a bond-buying program that PBOC Deputy Governor Pan Gongsheng said Friday was adding to yuan depreciation pressure.

Euro Slide

The euro has tumbled 7.1 percent against the dollar this year on the European Central Bank’s plan to pump 1.1 trillion euros ($1.2 trillion) into the economy to stoke inflation. Greece’s Syriza leader Alexis Tsipras, addressing supporters in central Athens Sunday night after outgoing Prime Minister Antonis Samaras conceded defeat, said the country’s era of bowing down to international creditors is over.

The yuan’s nominal effective exchange rate in trade-weighted terms climbed to a record on Jan. 7, according to an index compiled by Westpac Banking Corp. The Chinese currency sank as low as 6.2569 a dollar Monday, the weakest since June and a record 1.89 percent discount to the central bank’s reference rate. The People’s Bank of China cut its daily fixing by 0.07 percent to 6.1384 a dollar, the lowest since Dec. 4.

Pound Fixing

The PBOC revised one of the yuan’s reference rates during trading hours on Monday, weakening the fixing against the British pound by 2.1 percent to 9.2406 after price quotes for the currency pair failed to fall within the permitted trading range. The yuan was quoted as weak as 9.3843 a pound in Shanghai, a 3.6 percent discount to today’s original fixing of 9.0444, according to China Foreign Exchange Trade System prices. The central bank allows the currency pair to diverge from its reference rate by a maximum 3 percent.

After more than a decade of curbing the yuan’s gains to help turn China into a manufacturing colossus, there are signs the PBOC is now propping up its currency to stem an exodus of capital that’s threatening the economy, according to economists at Daiwa Capital Markets and Morgan Stanley.

A gauge of capital flows on the PBOC’s balance sheet fell by the most since 2003 last month in a sign it’s selling foreign currency. The PBOC has also raised the yuan’s reference rate against the dollar in each of the past five months, helping deter bets on depreciation.

Widening Risk

The central bank doubled the yuan’s trading band versus the dollar to 2 percent on either side of the fixing in March 2014. The range is at risk of imminent widening again as the latest retreat is comparable to the weakness seen before the last revision, Andy Ji, a Singapore-based strategist at Commonwealth Bank of Australia, wrote today in a research note.

The PBOC may widen the band to 3 percent this year as long as the currency continues to demonstrate two-way volatility, Charles Feng, Hong Kong-based head of foreign exchange, rates and credit trading for Northeast Asia at Standard Chartered Plc, said at a briefing on Jan. 22.

One-month implied volatility in the yuan, a measure of expected swings used to price options, jumped 68 basis points today to a one-month high of 2.87 percent. That’s the biggest increase since 2011.

In Hong Kong’s offshore trading, the yuan dropped 0.08 percent to 6.2566 a dollar, after sliding 0.63 percent on Friday, data compiled by Bloomberg show. Twelve-month non-deliverable forwards slipped as much as 0.4 percent to 6.3790, the weakest level since October 2012.

The yuan’s decline in Shanghai “partly reflects the weaker fixing but largely comes due to depreciation of the offshore yuan,” according to Dariusz Kowalczyk, a Hong Kong-based strategist at Credit Agricole CIB. The currency could weaken to 6.30 in coming months, he said.

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