Offshore Yuan Set for Second Weekly Drop as Fed Rate Odds Climb

  • Sovereign bonds pare losses as 10-year yields decline Friday
  • Resumption of 14-day reverse repos to ensure ample cash: PBOC

Will the Fed Keep September in Play?

The offshore yuan headed for a second weekly decline as rising odds of a Federal Reserve interest-rate increase boosted the dollar and private gauges of corporate confidence showed ebbing sentiment on China’s economy.

The currency retreated 0.22 percent to 6.6830 against the greenback as of 4:59 p.m. in Hong Kong, extending its loss from Aug. 19 to 0.4 percent. A gauge of the dollar’s strength is set for a weekly gain amid speculation Fed Chair Janet Yellen may shed light on the U.S. interest-rate outlook in a speech Friday.

Wagers on higher Fed rates have been boosted this week as officials including Vice Chairman Stanley Fischer signaled that a 2016 rate increase is still under consideration, even as evidence of uneven global growth casts doubt over the U.S. central bank’s willingness to tighten policy amid monetary easing in Asia and Europe. Chinese assets from bonds to stocks have also been affected this week by signs that policy makers are preparing to contain overheated markets.

“The drop in the yuan is mostly driven by a stronger dollar this week,” said Andy Ji, a Singapore-based currency strategist at Commonwealth Bank of Australia. The market will likely be disappointed and the dollar would weaken if Yellen’s comments aren’t as hawkish as expected, he said.

Chinese money-market rates climbed as the central bank’s use of a 14-day lending tool -- rather than just the usual seven-day instrument -- spurred concern that authorities are looking to increase the use of longer-term, more expensive funding as they look to curb leverage in the financial system. The government on Wednesday also imposed limits on lending by peer-to-peer platforms to individuals and companies in an effort to curb risk in the loosely regulated shadow-banking sector.

The monetary authority injected a net 310 billion yuan ($46.5 billion) this week in open-market operations, data compiled by Bloomberg show. That’s the biggest weekly addition in a month.

The seven-day repurchase rate, a gauge of interbank funding availability, declined 12 basis points on Friday to 2.37 percent, paring this week’s increase to five basis points, weighted average prices from the National Interbank Funding Center show. The onshore yuan weakened, while the Shanghai Stock Index retreated 1.2 percent from Aug. 19. Fed funds futures put the probability of a September U.S. interest rate hike at 32 percent, up from 22 percent a week ago.

Government bonds were little changed from a week earlier. The 10-year yield fell four basis points on Friday to 2.74 percent, after surging six basis points on Tuesday on news that the PBOC had gauged demand for 14-day repos. The yield on the similar-maturity benchmark dropped to 2.64 percent on Aug. 15, the lowest since Bloomberg began compiling ChinaBond data in 2006.

Tightening Risk

While economists aren’t predicting the central bank will raise benchmark lending rates any time soon, Lirong Xu, chief investment officer of Franklin Templeton’s joint venture in Shanghai, said that the PBOC’s policy may shift to tightening if it sees liquidity levels as too high.

The monetary authority is keeping ample market liquidity via a series of measures including open-market operations, PBOC Deputy Governor Yi Gang said in Beijing Friday. The 14-day reverse-repurchase agreements will help ensure ample liquidity, he said, adding that the PBOC will continue conducting seven-day reverse repos.

Standard Chartered Plc’s Small and Medium Enterprises Confidence Index fell to 54.9 this month from 55.5 in July, while the MNI China Business Sentiment Indicator dropped to 54.3 from 55.5, Market News International said in a statement. A less proactive monetary policy stance could be starting to have an impact, according to the statement.

— With assistance by Tian Chen, and Helen Sun

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