Yuan’s Sudden Retreat Erased as Traders Question Report on PBOC

Updated on
  • Offshore yuan falls as much as 0.7% before paring declines
  • Currency is poised for worst quarterly performance on record

The yuan touched its lowest level since January on a report that the People’s Bank of China is prepared to allow more currency weakness, before snapping back in less than an hour as traders questioned whether the central bank has shifted its policy stance.

The offshore yuan fell as much as 0.7 percent per dollar immediately after the report, before paring declines to 0.18 percent as of 6:26 p.m. in Hong Kong. The currency traded in Shanghai slid as much as 0.26 percent to 6.6550 and was last down 0.08 percent.

The PBOC is willing to let the yuan fall to 6.8 per dollar in 2016 to support the economy, which would mean the currency matching last year’s record decline of 4.5 percent, Reuters reported Thursday, citing policy sources. The report comes after Premier Li Keqiang reiterated Monday that the government is capable of keeping the yuan at a reasonable, balanced level, and there’s no basis for long-term devaluation.

China’s central bank said in a statement late Thursday that certain news outlets constantly publish inaccurate information about the exchange rate. This has misled investors, disrupted the market and encouraged speculative short-yuan trades, the PBOC said, adding that the nation will push ahead with reforms in the currency market.

“The yuan index has dropped nearly 6 percent so far this year, so the PBOC does not have a strong incentive to depreciate against the dollar in order to support growth,” said Ken Cheung, an Asian currency strategist at Mizuho Bank Ltd. in Hong Kong. “Therefore the 6.8 target exchange level may not be so plausible. However, the market reaction highlights that sentiment is really fragile."

Gradual Decline

The central bank declined to comment on the Reuters story. Bloomberg LP, the parent company of Bloomberg News, competes with Reuters in providing news and information.

Officials will aim to ensure a gradual decline to avoid triggering capital outflows seen earlier this year that drew criticism from trading partners including the U.S., Reuters said, citing government economists and advisers involved in regular policy discussions.

China’s currency has slumped 3 percent since the end of March, the biggest quarterly drop since the nation unified the official and market rates at the start of 1994. Losses deepened after the U.K.’s vote to secede from the European Union led to a jump in the dollar and dented the outlook for Chinese exports. The authorities intervened via banks to support the offshore yuan on Wednesday morning, according to people with knowledge of the matter.

"Over the past week, there have been signs that the central bank intervened to prevent the dollar-yuan rate from going higher," said Sean Yokota, head of Asia strategy at Skandinaviska Enskilda Banken in Singapore. "It’s very strange to see the news coming out. It doesn’t seem right."

Year-End Forecasts

The currency, which is trading near a five-year low, is forecast to weaken to 6.70 by year-end, based on the median estimate in a Bloomberg survey. A surging dollar is raising the risk of capital outflows from China at the same time as officials in Beijing contend with a slumping euro and mounting economic uncertainty in Europe, one of the country’s largest trading partners.

“It’s very highly unlikely that this is true, because no central bank in the world, including the PBOC, would draw a line in the sand and give a level that a currency could reach,” said Andy Ji, a Singapore-based foreign-exchange strategist at Commonwealth Bank of Australia. “The PBOC may want to keep the yuan stable for the rest of the year, and it’s unlikely the euro or pound would drop sharply against the dollar to push the yuan weaker to 6.8 by year-end."