Yuan Extends Retreat After Biggest Weekly Advance in Seven Years

China’s yuan had the biggest two-day drop since January as some investors judged excessive the currency’s biggest weekly advance in seven years.

The yuan’s 14-day relative-strength index was 24 on March 19, below the 30 level that indicates to some traders a reversal is likely. A preliminary Purchasing Managers’ Index for manufacturing will be 50.5 for March, compared with a final reading of 50.7 in the previous month, according to the median estimate in a Bloomberg survey before data on Tuesday. The dividing line between expansion and contraction is 50.

The yuan fell 0.16 percent to close at 6.2160 versus the greenback in Shanghai, extending its two-day loss to 0.32 percent, China Foreign Exchange Trade System prices show. The People’s Bank of China raised the reference rate by 0.08 percent to 6.1448, the strongest since Feb. 26. The gap between the spot rate and the fixing was 1.2 percent, within the central bank’s 2 percent limit.

“Investors are taking profits after last week’s rally,”said Patrick Bennett, a strategist at Canadian Imperial Bank of Commerce in Hong Kong. The spot rate gained 0.86 percent in the five days through March 20.

In the offshore market, the yuan dropped 0.13 percent to 6.2115 a dollar in Hong Kong, according to data compiled by Bloomberg. The currency jumped 1.3 percent last week, the most since trading commenced in 2010.

Reserve Currency

China is making the currency more convertible under the capital account and hopes the yuan can be included in the fund’s reserve currencies, People’s Bank of China Governor Zhou Xiaochuan told IMF managing director Christine Lagarde at a forum in Beijing Sunday. In response, Lagarde said the yuan “clearly belongs” in the Special Drawing Rights basket and the IMF will work with China to that end.

The Chinese government’s aim to internationalize the yuan and Zhou’s recent comments can give the yuan a short-term boost, Zhu Lixu, a Shanghai-based strategist at Xiangcai Securities, said by phone. But the currency still faces downside pressure as China’s economic fundamentals are weak and the U.S. dollar will remain strong, he said.

The composition of the SDR basket is reviewed every five years. In 2010, the IMF decided that the yuan couldn’t be added because it wasn’t freely usable.

— With assistance by Tian Chen

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