Yuan Forwards Decline Most in Two Weeks Amid Deflation Concern

Yuan forwards dropped the most in two weeks as the risk of deflation bolstered the case for Chinese policy makers to tolerate a weakening of their currency.

The People’s Bank of China cut its reference rate 0.03 percent to 6.1330 a dollar, following a 0.5 percent jump in the Bloomberg Dollar Spot Index on Wednesday. The central bank granted small lenders nationwide access to a short-term funding facility to help them meet cash demand before the week-long Lunar New Year holidays starting Feb. 18. China’s inflation in January fell to the lowest since November 2009.

“Recent strength in the dollar is weighing on emerging-market currencies including the yuan,” said Daniel Chan, an analyst at Brilliant and Bright Investment Consultancy Ltd. in Hong Kong. “Investors are also worried about deflation risks in China, and expect policy makers to implement more easing measures. That’s a short-term negative for the yuan.”

Twelve-month non-deliverable yuan forwards declined 0.08 percent, the most since Jan. 30, to 6.3738 a dollar as of 4:59 p.m. in Hong Kong, according to data compiled by Bloomberg. The contracts were 2 percent weaker than the spot rate in Shanghai, which slipped 0.04 percent to close at 6.2454, China Foreign Exchange Trade System prices show. The currency was at a 1.8 percent discount to the central bank’s fixing, within the 2 percent limit.

Consumer prices rose 0.8 percent from a year earlier in January, official data showed Feb. 10. Factory-gate prices fell for the 35th straight month.

China’s economy has limited downside as the property market is rebounding on easing liquidity, Shanghai Securities News reported Thursday, citing an interview with an unidentified official at the Shanghai Stock Exchange’s capital market research institute.

In Hong Kong’s offshore market, the yuan was little changed at 6.2475 a dollar, according to data compiled by Bloomberg.

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