Offshore Yuan Declines After PBOC Lowers Fixing for Second Day

  • Central bank reduces daily reference rate for second day
  • China to keep currency basket above 98 in near term: OCBC

The offshore yuan declined as China’s central bank lowered its reference rate for a second day, stoking speculation the authorities judged previous gains in the currency excessive amid a slowing economy.

The People’s Bank of China cut the fixing by a combined 0.53 percent on Monday and Tuesday, the biggest two-day reduction since January. The onshore yuan has gained 1.3 percent in the past two months, rebounding from its biggest annual decline in two decades. The nation’s economy will expand by 6.5 percent in 2016, the slowest pace in more than a quarter century, according to a Bloomberg survey.

“The PBOC doesn’t want to see excessive strength in the yuan as economic fundamentals remain weak,” said Zhou Hao, an economist at Commerzbank AG in Singapore. “The market is still expecting further declines in the yuan, which will likely hover around 6.5 to 6.6 against the dollar in the medium to long term.”

The yuan traded in Hong Kong dropped 0.15 percent to 6.4950 a dollar as of 5:30 p.m. local time. That extends the currency’s three-day decline to 0.6 percent, the most since Jan. 7. The People’s Bank of China reduced the fixing, which restricts onshore moves to 2 percent on either side, by 0.23 percent to 6.4971.

Yuan Basket

A Bloomberg replica of the CFETS RMB Index, which China uses to measure the yuan’s performance against 13 currencies, has fallen about 2.8 percent this year to 98.03. The Bloomberg Dollar Spot Index gained 0.3 percent on Monday after slumping to a five-month low last week as Federal Reserve officials unexpectedly cut their projections for interest-rate increases this year.

The dollar will gain in the coming months as the Fed will likely raise borrowing costs in June, forcing the yuan to weaken again, Koon How Heng, a senior foreign-exchange strategist at Credit Suisse Group AG’s private banking and wealth management unit in Singapore, wrote in a note.

“The PBOC may try to keep the basket stable and slightly above 98 in the near term, which it has been doing the past few days,” said Tommy Xie, an economist at Oversea-Chinese Banking Corp. in Singapore. “If the index breaks below 98, the market will request the central bank to justify how it defines a stable currency.”

Tobin Tax

China may adopt Tobin tax in the future to manage short-term cross-border flows, Wang Yungui, a director with the State Administration of Foreign Exchange’s General Affairs Department, said at a briefing in Beijing on Tuesday. The PBOC has drafted rules for such a levy, and the initial rate may be kept at zero to allow authorities time to refine the regulations, according to people with knowledge of the matter.

The seven-day repurchase rate, a benchmark gauge of interbank funding availability, was little changed at 2.33 percent, according to a weighted average price from the National Interbank Funding Center. The yield on government notes due January 2026 rose two basis points to 2.85 percent.

— With assistance by Tian Chen

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