Offshore Yuan Falls Most This Week Since March on Fed Signals

  • Dollar jumps this week as Fed signals possible June rate hike
  • Yuan index won't fall much further to avoid currency war: DBS

The offshore yuan posted its steepest five-day loss in six weeks as the dollar rebounded and investors speculated policy makers will guide the currency weaker amid a faltering economy.

The yuan weakened 0.4 percent against the dollar this week in Hong Kong. A Bloomberg gauge of the dollar is headed for its biggest weekly advance in six months after Federal Reserve officials suggested an interest rate increase could be on the table at the June meeting. An index tracking the Chinese currency versus 13 peers held within 0.1 percent of a 17-month low after private and official data for Chinese manufacturing released in the past week missed economists’ forecasts.

Data over the weekend will probably show China’s foreign reserves fell in April, while exports were little changed, according to Bloomberg surveys of economists. The stronger greenback risks upsetting a trading pattern that’s masked a weaker yuan and helped bolster overseas demand for the nation’s products. The dollar is poised for its first weekly gain against all 16 major peers since the middle of March.

The PBOC cut the daily fixing by 0.11 percent to 6.5202 per dollar on Friday, after the dollar gauge jumped 0.4 percent the day before. The yuan rose 0.1 percent to 6.50 as of 5:26 p.m. in Shanghai. The offshore yuan climbed 0.06 percent to 6.5154.

Yuan Fixing

"The market is leaning toward buying the dollar, selling CNH these days," said Ken Cheung, a foreign-exchange strategist at Mizuho Bank Ltd. in Hong Kong. "In the last couple of weeks, the dollar fell quickly but the dollar/yuan fixing was never raised beyond 6.45. That seems to show they don’t want the renminbi to be too strong, but conversely as U.S. dollar rebounds, cuts to the fixing are starting to follow the U.S. dollar rebound again."

The dollar’s weakness earlier this year gave the PBOC the best of both worlds: by raising the fixing less sharply, it enjoyed a yuan that’s steady against the dollar but falling versus its trade partners’ currencies. Now with the dollar rising, the question is whether China will extend trade-weighted declines to help exporters even though such a move risks re-igniting devaluation concern and fueling outflows.

"The yuan index won’t fall much further, or else there could be a currency war," said Nathan Chow, an economist at DBS Group Holdings Ltd. in Hong Kong. "They saw in January and December such strong capital outflows could cause turmoil, so they won’t let the yuan depreciate sharply for now."

A Bloomberg replica of the CFETS RMB Index climbed less than 0.1 percent to 96.62 on Friday, paring losses this year to 4.3 percent.

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