Offshore Yuan Stabilizes as PBOC Halts Fixing's Losing Streak

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  • Reference rate strengthened for first time in 11 days
  • Currency swung to a gain on Monday amid suspected intervention

Yuan fluctuations were relatively slight in Hong Kong trading after the central bank raised the currency’s reference rate for the first time in 11 days, helping ease depreciation pressure.

The People’s Bank of China set the daily fixing 0.02 percent stronger at 6.3740 per dollar, bringing to an end the longest run of declines since 2008. The offshore currency on Monday swung to a 0.3 percent gain from a 0.13 percent loss within three minutes in the afternoon on suspected PBOC intervention. It closed 0.13 percent higher. The surge came about after the offshore yuan’s discount to the onshore spot rate widened to the most this month, thwarting China’s goal of having the rates converge amid its bid to become a reserve currency at the International Monetary Fund.

"There’s some mild buying force amid the suspected intervention and a stronger fix," said Daniel Chan, a Hong Kong-based analyst at Brilliant & Bright Investment Consultancy Ltd. "That said, as the yuan will likely be accepted as a reserve currency, we should see more volatility as the exchange rate becomes more market-oriented. The market will focus on China’s economic fundamentals, which actually don’t look that great."

The freely traded offshore spot rate stayed within 0.1 percent of Monday’s closing level for most of the day, and was down 0.06 percent at 6.4025 per dollar as of 5:05 p.m. in Hong Kong, according to data compiled by Bloomberg. In Shanghai, the yuan dropped 0.1 percent, the most since Nov. 9, to close at 6.3786, giving a spread of 239 pips between the two exchange rates. The difference, which exceeded 400 pips on Monday, exists because China restricts cross-border capital flows. In addition, moves in the onshore yuan are limited to 2 percent on either side of the central bank’s daily fixing.

IMF Managing Director Christine Lagarde announced late Friday that her staff have recommended the yuan be included in the fund’s Special Drawing Rights, alongside the U.S. dollar, euro, pound and yen. The recommendation makes approval all but certain with the fund’s major shareholders including the U.S. having said they’d support the Chinese currency’s entry so long as it met the requirements.

Adding the yuan to the basket of reserve currencies would help foster economic stability, China’s special envoy on Group of 20 affairs, Wang Xiaolong, said on the sidelines of a summit in Turkey on Monday. China hopes the IMF’s executive board, which is set to meet Nov. 30, will vote for the change, Wang said.