Yuan Falls to 15-Month Low Versus Basket as Fixing Lags Dollar

  • Further drop in index may spur central bank support, OCBC says
  • Reference rate shows China doesn't want excessive gains: DBS

The yuan fell to a 15-month low versus a basket of currencies as a smaller-than-estimated increase in the central bank’s fixing spurred speculation that China is trying to limit gains against the dollar.

The monetary authority raised its daily reference rate by 0.32 percent, compared with a 1.1 percent drop in a gauge of the greenback’s strength. The difference prompted economists to question the importance of market forces in the fixing, with Oversea-Chinese Banking Corp. saying it appears that the rate continues to be a tool to guide investor expectations.

A Bloomberg replica of the CFETS RMB Index, which China uses to measure the yuan’s performance against 13 currencies, fell to 98.3, the lowest since December 2014. The onshore yuan rose 0.59 percent, the most in a month, to 6.4856 a dollar as of 5:47 p.m. in Shanghai, after the People’s Bank of China boosted its fixing to 6.4961. The offshore exchange rate in Hong Kong was little changed at 6.4851, according to data compiled by Bloomberg.

“The fixing was lower than expected, considering the dollar’s weakness overnight and suggests that the reference rate is still not fully market-based,” said Tommy Xie, an economist at OCBC in Singapore. “I expect the PBOC to offer some form of support, such as raising the fixing to a stronger level, when the index drops below 98. That’s a level that could send a signal that China’s economy has been slowing and the yuan has been dropping too quickly.”

Exports slumped 25 percent in February from a year earlier and the trade surplus almost halved from January’s level, making a case against yuan gains. This complicates Premier Li Keqiang’s management of the world’s second-largest economy, forcing him to walk a thin line between currency depreciation to boost growth, and trying to avoid spurring further capital outflows.

The central bank has drafted rules for a tax on foreign-exchange transactions that would help curb currency speculation, according to people with knowledge of the matter. The initial rate of the so-called Tobin tax may be kept at zero to allow authorities time to refine the rules, said the people, who asked not to be identified as the discussions are private.

The Chinese currency has returned to a more “normal, rational and fundamentals-driven” trend, and the nation doesn’t need to use the foreign-exchange policy to boost trade, PBOC Governor Zhou Xiaochuan told reporters on Saturday. His deputy, Yi Gang, said in February that the exchange rate will be determined mainly by a basket of currencies. The central bank, soon after it shocked global markets by devaluing the yuan in August, said it was moving to a more-based system for setting the daily fixing.

Onshore Yuan

"The onshore yuan strengthened because the fixing was stronger and the market is selling the dollar heavily," said Ken Cheung, a currency strategist at Mizuho Bank Ltd. in Hong Kong. "The Fed’s comments yesterday were much more dovish than expected. the market thinks that the monetary easing for major central banks has already entered a turning point that policy divergence may not widen further too much."

The dollar weakened on Wednesday after Federal Reserve officials scaled back interest-rate expectations. They cited the potential impact from weaker global growth and financial-market turmoil on the U.S. economy for keeping the target range for the benchmark federal funds rate at between 0.25 percent and 0.5 percent.

“The fixing is not reflecting all the dollar weakness overnight," said Tommy Ong, managing director for treasury and markets at DBS Hong Kong Ltd. "This shows that the PBOC doesn’t want the currency to strengthen too much."

In the money markets, the seven-day repurchase rate, a gauge of interbank funding availability, rose one basis point to 2.30 percent, 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, climbed two basis points to 2.28 percent, data compiled by Bloomberg show.

The yield on government notes due January 2026 advanced two basis points to 2.83 percent, prices from the National Interbank Funding Center show.

— With assistance by Tian Chen

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