China's Yuan Closes at Four-Year Low on Signs PBOC Allowing Drop

  • Fed liftoff good excuse to let currency fall: Bank of America
  • There's no basis for long-term depreciation: SAFE official

China’s yuan closed at the weakest level in more than four years on signs the central bank is allowing depreciation to boost exports in the run-up to the Federal Reserve’s interest-rate decision.

The People’s Bank of China cut the yuan’s reference rate, which restricts the onshore spot rate’s moves to a maximum 2 percent on either side, by 0.15 percent to a four-year low of 6.4236 a dollar. The monetary authority has cut the fixing on six of the eight trading days since winning reserve status at the International Monetary Fund on Nov. 30. There’s a 78 percent chance the Fed will raise borrowing costs at its Dec. 15-16 meeting, futures contracts show.

The yuan dropped 0.15 percent to 6.4378 a dollar, the weakest close since August 2011, China Foreign Exchange Trade System prices show. The currency fell for a fifth day and has lost 0.6 percent this month. In Hong Kong’s offshore market, the yuan slipped 0.03 percent to 6.5221, according to data compiled by Bloomberg, taking its decline in December to 1.4 percent.

“All it takes for the renminbi to go down is for the PBOC to stop propping it up,” said David Woo, Bank of America Corp.’s head of global rates and foreign-exchange research. “I see the Fed hike next week as giving them the perfect excuse to slow further, if not suspend their foreign-exchange interventions altogether.”

Letting the yuan decline shouldn’t be viewed as China engaging in competitive devaluation, said Woo, adding the authorities are letting the currency move in line with economic fundamentals.

Dollar Demand

The recent drop in the yuan is mainly due to the appreciation of the dollar, Wang Yungui, a director at the State Administration of Foreign Exchange, said at a regular briefing in Beijing on Thursday. There isn’t any basis for long-term depreciation, he said.

Exports fell 6.8 percent in November in dollar terms from a year earlier, compared with the median estimate of a 5 percent decline, data showed this week. Imports extended a record losing streak to 13 months. Foreign-exchange reserves fell $87 billion, more than the forecast drop of $33 billion, as the PBOC sold dollars to support the yuan before the IMF decision.

The yuan’s one-month implied volatility, a measure of expected price swings used to price options, jumped 42 basis points to 5.52 percent.

"There’s a build-up of dollar demand in the run-up to the Fed liftoff," said Johanna Chua, the chief economist for Asia Pacific at Citigroup Global Markets in Hong Kong. "Why reverse the trend and waste your dollars?"

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