Yuan Extends Drop as Tobin Tax Plan, Fed Concern Sour Sentiment

  • U.S. central bank seen raising interest rates twice this year
  • China currency tax proposal negative for yuan liquidity: ANZ

The yuan posted its biggest three-day loss in two months on speculation a potential currency tax will hurt investor sentiment and that any rate-increase signals by the Federal Reserve will curtail emerging-market inflows.

The U.S. central bank, which ends a two-day meeting on Wednesday, will stick to a plan to gradually raise borrowing costs and tighten policy twice this year, according to Bloomberg surveys of economists. This will further add pressure on the yuan after people familiar with the matter said China is drafting rules for a so-called Tobin tax on foreign-exchange transactions.

“The Fed meeting is taking center stage right now,” said Khoon Goh, a senior currency strategist at Australia & New Zealand Banking Group Ltd. in Singapore. “We’ve seen a stronger dollar as the market is positioning for a rate hike in June. We’re expecting the Fed statement to be more upbeat.” A Tobin tax would be negative for yuan liquidity and sentiment, he added.

The yuan declined 0.09 percent to 6.5180 a dollar as of 5:32 p.m. in Shanghai, according to China Foreign Exchange Trade System prices. That takes its three-day retreat to 0.4 percent, the most since Jan. 8. The offshore rate in Hong Kong extended this week’s losses to 0.6 percent. The People’s Bank of China weakened its reference rate by 0.14 percent to 6.5172 after a gauge of dollar strength climbed overnight.

Chinese banks sold a net 228.5 billion yuan ($35.1 billion) of foreign exchange for clients in February, the State Administration of Foreign Exchange said on its website. That’s the smallest amount since October.

Tax Criticism

Plans for the Tobin tax have drawn criticism from economists, with Skandinaviska Enskilda Banken describing it as a setback to a path toward freer markets and Mizuho Bank Ltd. saying that even long-term investors could become wary of trading the yuan.

In the U.S., improving economic data have boosted the outlook for Fed policy tightening. Citigroup’s Economic Surprise Index for the U.S., which measures the strength of data relative to analyst forecasts, climbed to minus 5.1 on Tuesday, the highest closing level since November, after falling to an eight-month low of minus 55.7 on Feb. 4.

China’s economy won’t have a hard landing and the government will ensure growth hits targets, Premier Li Keqiang told reporters, as the largest annual gathering of the nation’s lawmakers drew to a close. The country needs to promote reforms to stimulate markets, Li said, while talking down the risk of the nation’s high levels of debt and suggesting a debt for equity swap to cut leverage ratios. The government is in a good position to defuse any credit risks and banks are well provisioned for any spike in bad debt, he added.

Money Markets

In the money markets, the seven-day repurchase rate, a gauge of interbank funding availability, was little changed at 2.29 percent, according to a weighted average from the National Interbank Funding Center. The yield on government notes due January 2026 fell four basis points to 2.81 percent.

The PBOC auctioned 20 billion yuan of seven-day reverse-repurchase agreements on Wednesday, bringing this week’s total offering to 50 billion yuan. The central bank kept the interest rate unchanged at 2.25 percent.

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