Offshore Yuan Erases Losses as PBOC Stabilizes Reference Rate

  • Central bank currency fixing little changed for a second day
  • China doesn't want to add to volatility seen last week: ANZ

The offshore yuan erased early losses after China’s central bank kept the currency’s daily fixing stable for the second day in a row, calming markets after sparking turmoil last week.

The People’s Bank of China on Friday ended an eight-day run of reductions to the reference rate that sent shockwaves through financial markets, triggered trading halts in onshore equity markets for two days last week. The Standard & Poor’s Index fell 1.1 percent on Friday, capping its worst-ever start to a year.

The offshore yuan rose 0.13 percent to 6.6742 a dollar as of 11:03 a.m. in Hong Kong, after declining as much as 0.37 percent. It sank as low as 6.7618 last week, within 0.4 percent of a record 6.7850 seen in September 2010. The monetary authority set the reference rate, which restricts onshore moves to a maximum 2 percent on either side, at 6.5626 a dollar, little changed from 6.5636 on Friday and 6.5646 the previous day.

“The bias is to keep the fixing stable in order to keep stocks stable after what happened to the S&P on Friday,” said Irene Cheung, a currency strategist at Australia & New Zealand Banking Group Ltd. in Singapore. “China doesn’t want to add more to the concerns and volatility that we’ve seen last week.”

IMF Concern

The yuan’s spot rate in Shanghai rose 0.15 percent to 6.5839 a dollar. The offshore currency’s 1.7 percent decline last week pushed its discount to the Shanghai price to a record 2.9 percent, prompting the International Monetary Fund to say that it will discuss the widening spread with the authorities. The PBOC has weakened its daily fixing by 2.5 percent since winning entry into the IMF’s reserves basket on Nov. 30.

A Bloomberg replica of a new yuan index, composed of 13 currencies and published by CFETS, was at 99.6, near the lowest level since December 2014. The official CFETS RMB Index dropped 1.5 percent in the past month to 99.96 on Jan. 8, according to a statement on its website.

The monetary authority will seek to keep the yuan’s exchange rates “basically stable” at reasonable and equilibrium levels and work to further promote the internationalization of the currency, it said in a statement on its website Friday. The nation’s consumer price index rose 1.6 percent in December, below the government’s target of around 3 percent for 2015, show data released by the National Bureau of Statistics on Saturday.

The PBOC will reduce benchmark interest rates twice by a total of 50 basis points and lower lenders’ reserve-requirement ratios two times by 50 basis points each in the first half of this year, as deflation risks linger and the economic outlook stays weak, Barclays Plc economists led by Jian Chang wrote in a note.

“Market sentiment remains very fragile, so the PBOC intended to stabilize the foreign-exchange market with today’s fixing,” said Ken Cheung, a Hong Kong-based strategist at Mizuho Bank Ltd. "The Chinese authorities will avoid fighting a two-front war in currency and equities.”

— With assistance by Tian Chen, and Saijel Kishan

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