Yuan Resisting Five-Year Low Spurs Bets PBOC Controlling Descent

  • Allowing drop past key levels dangerous for outlook: Mizuho
  • At least one Chinese bank sold the dollar Wednesday: traders

The yuan resisted a drop beyond a five-year low, after coming close to slipping past that level several times, amid speculation China is trying to limit the currency’s decline to avoid exacerbating depreciation expectations.

The yuan fell 0.03 percent to 6.5827 a dollar as of 5:28 p.m. in Shanghai on Thursday, according to China Foreign Exchange Trade System prices. Trading calmed after a volatile Wednesday, when the yuan spiked for about a minute in the early afternoon before resuming losses, followed by another rally later in the day that spurred speculation state-run lenders were supporting the currency. The yuan fell to 6.5945 yesterday, near the five-year low of 6.5956 seen on Jan. 7.

“Letting the yuan depreciate beyond 6.6 is a bit dangerous as this might start to affect expectations,” said Ken Cheung, a foreign-exchange strategist at Mizuho Bank Ltd. in Hong Kong. “The central bank may prefer to wait for U.S. non-farm payrolls to gauge the likelihood of the Fed raising rates.”

The exchange rate fell the most in nine months in May as increasing odds of a Federal Reserve interest-rate increase as early as in June renewed the threat of capital outflows. Traders are now pricing in a 22 percent chance the Fed will raise borrowing costs this month, almost double the odds given at the end of April.

Index Rises

The offshore yuan trading in Hong Kong was little changed at 6.5877. A Bloomberg replica of the CFETS RMB Index rose 0.03 percent to 97.11, halting a two-day drop.

The onshore currency rallied as much as 0.18 percent during a 35-minute period late Wednesday afternoon. While the rebound was helped by manufacturing data that lifted the euro, Natixis SA’s Iris Pang said some major Chinese banks may have been selling the dollar to support the yuan. At least one big Chinese bank was selling dollars to keep the yuan stable on Wednesday, according to two traders.

Thursday’s yuan fixing of 6.5688 was near ING Groep NV’s estimate of 6.5685, and Cheung said it was also in line with Mizuho’s estimate. The PBOC is still promoting a more market-based fixing mechanism, which has reduced the rate’s influence on the market as it is no longer seen as a signal of official intention, he added.

Analysts are cutting their forecasts for the yuan at the fastest pace since January. The exchange rate will weaken 1.8 percent the rest of this year to 6.70 a dollar, according to the median estimate in a Bloomberg survey of analysts including at Credit Suisse Group AG and Mitsubishi UFJ Financial Group Inc. That translates to a forecast cut of 0.6 percent, the most since Jan. 25.

Government bonds fell, pushing the 10-year yield up three basis points to 3.02 percent, the highest for a benchmark note of that tenor since Dec. 14.

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