PBOC Fuels Depreciation Talk as It Weakens Fixing for Sixth Day

  • China may need to step up efforts to ease concerns: Scotiabank
  • Currency’s decline an intentional policy choice, MUFJ says

PBOC Weakens Yuan Fixing for Sixth Day

China’s central bank weakened the yuan’s reference rate for a sixth day, the longest run of cuts in nine months, amid speculation policy makers will allow further declines as the dollar rises.

The next possible target is 6.83 against the greenback, with a potential Federal Reserve interest-rate increase supporting the dollar, said Shaun Osborne, chief foreign-exchange strategist at Bank of Nova Scotia in Toronto. The People’s Bank of China may need to step up efforts to prevent market fears over any sharp depreciation, according to a Scotiabank report written by Singapore-based foreign-exchange strategist Qi Gao.

The PBOC set its daily fixing at 6.7258 against the dollar, extending a six-day weakening run to 0.9 percent. The onshore yuan rose 0.05 percent to 6.7152 as of 4:57 p.m. in Shanghai, after dropping to a six-year low of 6.7230 earlier in the day, while the offshore rate climbed 0.1 percent. The Chinese currency has fallen 6.5 percent against a 13-currency index this year.

“The yuan’s depreciation against the dollar and versus a trade-weighted basket are both intentional policy choice,” said Cliff Tan, a currency strategist in Hong Kong at Bank of Tokyo-Mitsubishi UFJ. “They do want the depreciation; they just don’t want it to happen quickly. Our forecast is still 6.80 at the end of this year, and it looks like the currency is headed there. ”

Global Turmoil

The six-day run of weaker fixings is the longest since January, when the PBOC alarmed global markets and spurred concern that it wasn’t following market moves. Investors will be scouring September meeting minutes from the Federal Reserve, which are due on Wednesday, for evidence that Chair Janet Yellen is under pressure to increase borrowing costs soon. Odds of a U.S. rate rise by year-end have ticked up to almost 68 percent, amid speculation a recent surge in oil prices will fuel inflation.

The PBOC is letting the yuan decline now that it has already become part of the International Monetary Fund’s Special Drawing Rights on Oct. 1, according to Sue Trinh, Royal Bank of Canada’s Hong Kong-based head of Asian foreign-exchange strategy.

“Given the rising possibility of a Fed interest-rate hike, it’s reasonable to expect the Asian currencies and the yuan to weaken further from here,” said Christy Tan, head of market strategy at National Australia Bank Ltd. in Hong Kong. “But the momentum may not be as significant as some people expect.”

The PBOC drained a net 165 billion yuan ($24.6 billion) from the financial system on Wednesday, pulling funds for a third day in open-market operations, data compiled by Bloomberg show.

The overnight repurchase rate, a gauge of interbank funding availability, rose two basis points to 2.11 percent, weighted average prices show. Government bonds declined, with the 10-year yield adding one basis point to 2.70 percent, according to National Interbank Funding Center prices.

— With assistance by Helen Sun

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