Yuan in Longest Declining Run Since December as PBOC Cuts Fixing

  • China focusing more on index of currencies, OCBC's Xie says
  • Dollar plays biggest role in currency basket: Governor Zhou

China Cuts Reserve Ratio in Latest Economic Boost

The yuan weakened for a seventh day, the longest run of declines since December, as China’s central bank lowered the currency’s reference rate and the dollar advanced amid data showing a strengthening U.S. economy.

The People’s Bank of China reduced its reference rate for the fifth day in a row to 6.5452 a dollar. The yuan’s drop suggests that the People’s Bank of China is paying more importance to moves against a basket of currencies, according to Oversea-Chinese Banking Corp. A Bloomberg replica of the CFETS RMB Index, which was unveiled in December and measures the yuan against 13 exchange rates, shows the Chinese currency has been trading in a range of 101 and 99 in the past eight weeks.

“The key message over the past week is that the authorities are looking at the basket more and keeping the yuan stable to that rather than the dollar,” said Tommy Xie, a Singapore-based economist at OCBC.

The yuan fell 0.09 percent to 6.5472 a dollar in Shanghai as of 5:10 p.m. on Monday, taking its seven-day decline to 0.5 percent, according to China Foreign Exchange Trade System prices. The offshore currency traded in Hong Kong dropped 0.02 percent to 6.5478. Both rates posted their first monthly gains since October. A measure of dollar strength rose 0.7 percent on Feb. 26, the most since Dec. 17, as data showed the U.S. economy expanded more than estimated in the fourth quarter.

Stability Bets

The PBOC has been trying to restore stability to the yuan this year after capital outflows quickened following a surprise devaluation of the currency in August. The nation has been burning through foreign reserves to defend the yuan, depleting the stockpile by $513 billion last year in the first annual decline in more than two decades. The figure includes a $100 billion drop in the valuation of the holdings, according to a statement distributed to reporters before the PBOC briefing on Friday.

There’s no basis for continued depreciation of the yuan because China’s balance of payments is good, capital outflows are normal and the exchange rate is basically stable against the basket of currencies, PBOC Governor Zhou Xiaochuan said in an interview with Caixin magazine earlier this month. On Feb. 26, he said that the dollar still plays the most important role in the basket of currencies against which the central bank pegs the yuan.

Money Markets

In money markets, the central bank auctioned 230 billion yuan ($35 billion) of seven-day reverse-repurchase agreements on Monday, leaving a net injection of 150 billion yuan. The interest rate was kept unchanged at 2.25 percent.

The one-day repurchase rate, a gauge of interbank funding availability, climbed five basis points to 1.98 percent in Shanghai, according to a weighted average from the National Interbank Funding Center. The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repo rate, rose one basis point to 2.31 percent, data compiled by Bloomberg show.

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