Offshore Yuan Trades Near Six-Year Low as Dollar Surges on Fed

  • Discount to Shanghai rate widest since June amid China holiday
  • Onshore yuan may catch up when market reopens, analyst says

The offshore yuan traded near a six-year low amid a surge in the dollar, exacerbating depreciation pressures on the Chinese currency when mainland traders return from a week-long holiday on Monday.

The overseas rate has dropped 0.5 percent this week, declining beyond 6.7 a dollar for the first time in almost a month and widening its discount to the onshore spot price to the biggest since June. The yuan’s drop is warranted with the dollar gaining on hawkish interest-rate comments from Federal Reserve officials and estimates of strong U.S. jobs numbers to be released Friday, Ying Jian, a senior economist at Bank of China Hong Kong, wrote in a note.

A gauge of the greenback’s strength surged 1.4 percent this week, the most since May, as Fed officials talked up the possibility of a rate increase. Investors are pricing in a 63 percent probability that the U.S. central bank will raise borrowing costs by year-end, while data later Friday are forecast to show that employers added more jobs in September. Monday will be the first onshore trading day for the yuan since it entered the International Monetary Fund’s Special Drawing Rights on Oct. 1, with Scotiabank saying that the People’s Bank of China may curb excessive volatility.

“The onshore yuan is likely to catch up with the offshore rate’s decline when China reopens,” said Kenix Lai, a Hong Kong-based foreign-exchange analyst at Bank of East Asia Ltd. “The PBOC may allow the yuan to depreciate in a controlled manner this quarter, and I expect the currency to test 6.80 by year-end.”

The yuan traded in Hong Kong was little changed for the day at 6.7080 a dollar as of 4:51 p.m. on Friday, It dropped to 6.7182 earlier, near the weakest closing level since September 2010. The onshore currency finished last Friday at 6.6745, while the gap between the two rates increased to as wide as 0.6 percent, the most since June.

The onshore Chinese currency has weakened 2.7 percent against the dollar this year, the most in Asia, and dropped almost 7 percent versus a trade-weighted gauge as policy makers were seen encouraging declines to help an economy expanding at the slowest pace in more than two decades. Recent data on manufacturing, industrial profits and retail sales suggest that growth is stabilizing, if not picking up.

Many traders didn’t expect the offshore yuan to weaken beyond 6.7 during the China holidays, said Ryan Lam, Hong Kong-based head of research at Shanghai Commercial Bank Ltd. Chinese agent banks don’t appear to be defending the level, though it’s too early to say if policy makers have scrapped that line in the sand, he added.

Reserves Drop

China’s foreign-exchange reserves declined more than expected in September, amid speculation the central bank resumed selling dollars to support the yuan. The stockpile shrank to $3.17 trillion last month, the PBOC said in a statement Friday. That was below the median estimate of $3.18 trillion in a Bloomberg survey of economists.

“Any large declines will be filtered and the yuan fixing will be monitored when onshore markets return on Monday,” said Gao Qi, a Singapore-based foreign-exchange strategist at Scotiabank. “The direction is depreciation amid a broadly strengthening dollar, but the chances of a sharp drop are low as steady global economic and financial developments are required to pave the way for a Fed rate hike in December.”

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