Offshore Yuan Gains on Speculation Traders Paring Weakening Bets

  • Dollar gauge drops after slump in U.S. consumer confidence
  • Market doesn't want to test PBOC's bottom line: Commerzbank

The offshore yuan strengthened the most this month on speculation traders are paring bets the currency will weaken after a surprise drop in U.S. consumer confidence pushed down the greenback.

A gauge of the dollar’s strength fell for a second day as an index of consumer sentiment slumped to the lowest level in more than a year in November. The International Monetary Fund’s executive board will vote on whether to include the yuan in its Special Drawing Rights basket of reserves on Nov. 30.

“Long-dollar positions against the offshore yuan are getting unwound as the dollar has been getting sold off in Asia” due to the weak data in the U.S., said Khoon Goh, a Singapore-based senior foreign-exchange strategist at Australia & New Zealand Banking Group Ltd. Exporters selling the greenback as the end of the month approaches may have also contributed to the move, he said.

The yuan gained 0.17 percent to 6.4207 a dollar as of 4:52 p.m. in Hong Kong, according to data compiled by Bloomberg. That’s the biggest gain since Oct. 30. The currency traded at a 0.5 percent discount to the onshore rate in Shanghai, which closed little changed at 6.3892, China Foreign Exchange Trade System prices show. The People’s Bank of China set its daily reference rate, which the onshore yuan can trade as much as 2 percent either side of, at 6.3877.

Offshore Discount

The difference between the offshore and onshore yuan exists because China restricts cross-border capital flows. The mismatch means the rate in Hong Kong can’t be used as a perfect hedge for onshore exposure, the IMF said in August. The fund’s staff recommended this month the yuan be added to the institution’s SDR basket, alongside the dollar, euro, pound and yen.

The U.S. won’t allow an acceleration of the yuan’s internationalization to challenge the greenback’s dominant position and will make “all-out efforts” to suppress the yuan with a strong dollar strategy, Wang Yong, a professor at the PBOC’s Zhengzhou training school, wrote in Shanghai Securities News on Wednesday.

"The market doesn’t want to test the PBOC’s bottom line, because everybody knows the central bank is willing to and has the capability to support the yuan and close the gap before the IMF’s final decision," said Zhou Hao, a senior economist at Commerzbank AG in Singapore. "China will likely allow a gradual depreciation of the yuan after the SDR due to the slowing economy."

— With assistance by Tian Chen

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