Yuan Rises From Five-Year Low Amid Bets PBOC Supporting Currency

  • China doesn’t want too weak a rate to affect fixing: OCBC
  • MSCI rejection adds to downward pressures, Barclays says

MSCI Spurns China's A-Shares for a Third Time

The yuan pulled back from a five-year low to climb the most in more than a week amid speculation China’s central bank is supporting the currency.

The monetary authority doesn’t want excessive declines because that would weaken the next day’s fixing as well, said Tommy Xie, an economist at Oversea-Chinese Banking Corp. in Singapore. He was referring to the People’s Bank of China formula of setting the yuan’s daily reference rate, which uses the 4:30 p.m. price as a key input.

“The PBOC could be propping up the yuan in the spot market,” Xie said. “The yuan is at a tipping point -- if it keeps weakening, many individuals and corporates will try to convert their yuan holdings into the dollar, pressuring the exchange rate even lower."

The currency rose 0.19 percent to 6.5840 a dollar as of 4:53 p.m. in Shanghai, China Foreign Exchange Trade System prices show. It fell as much as 0.12 percent earlier, weighed down by MSCI Inc.’s decision to leave Chinese stocks out of its benchmark indexes. The currency in Hong Kong advanced 0.12 percent after tumbling to a four-month low as the PBOC reduced its reference rate beyond 6.6 for the first time in five years.

Downward Pressure

MSCI, whose emerging-market index is tracked by investors with $1.5 trillion in assets, cited the need for additional improvements in the accessibility of China’s share market and said that it would reconsider inclusion in 2017. The move adds to downward pressure on the yuan and comes amid a surge in the dollar, rising odds of a Federal Reserve interest-rate increase and Britain’s possible exit from the European Union.

“There will be some disappointment from the decision to delay inclusion,” said Mitul Kotecha, head of Asia currency and rates strategy at Barclays Plc in Singapore. “Given negative factors in the market at the moment, such as rising risk aversion, I think you’ve got enough factors here to put further pressure on the yuan.”

The dollar advanced Tuesday as investors dumped riskier currencies before central bank meetings in the U.S. and Japan and the U.K. Brexit referendum on June 23. The Federal Reserve is due to release its policy review statement later in the day.

Currency Risks

"The natural bias is of course for the onshore and offshore yuan to weaken from here, along with other dollar supportive forces like Brexit event risks and also global risk aversion," said Christy Tan, head of markets strategy in Hong Kong at National Australia Bank Ltd.

The PBOC auctioned 65 billion yuan ($9.9 billion) of seven-day reverse-repurchase agreements on Wednesday, bringing this week’s net injections to 35 billion yuan, data compiled by Bloomberg show.

The seven-day repo rate, a gauge of interbank funding availability, rose two basis points to 2.29 percent, according to National Interbank Funding Center prices. The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repo rate, was unchanged at 2.53 percent.

Government bonds were little changed, with the yield on notes due May 2026 at 2.97 percent, data from the National Interbank Funding Center show.

— With assistance by Robin Ganguly, Justina Lee, and Tian Chen

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