Yuan Trades Near Six-Year Low as Fed Rate Bets Add to Pressure

  • Inevitable that currency will drop to 7.1 a dollar: SocGen
  • One-day repo rate rises for sixth day as PBOC drains cash

China’s yuan erased early gains to trade near a six-year low amid concern that a potential Federal Reserve interest-rate increase will pressure the currency lower.

It is “inevitable” that the onshore yuan will head toward 7.1 a dollar in the coming 12 months, according to a research note from Societe Generale SA Tuesday. It added that the current weakness could last for another two to three months, as indicated in patterns observed since 2014. The median forecast in a Bloomberg survey is for the Chinese currency to finish this year at 6.75 a dollar, and to end 2018 at 6.82.

The yuan traded in Shanghai strengthened as much as 0.05 percent before dropping to trade little changed at 6.7388 a dollar as of 4:57 p.m. In Hong Kong’s overseas market, the currency edged close to touching 6.75 for the first time since January and was last at 6.7440. The onshore exchange rate lost its gains despite a two-day drop in a gauge of dollar strength.

“The yuan will continue to depreciate against the greenback if the dollar strengthens against the backdrop that investor risk appetite will be low as U.S. elections loom and the Fed may hike this year,” said Andy Ji, a Singapore-based currency strategist at Commonwealth Bank of Australia. “But the currency will be kept stable against its peers."

While Fed Vice Chairman Stanley Fischer said that he sees limits to how far the U.S. can pursue a strategy aimed at continuing to reduce unemployment, the odds that the Fed will raise borrowing costs at the end of this year are more than even. An increase would drive up the dollar, and potentially reduce the flow of capital to emerging markets.

The risk appetite for emerging-market assets will worsen and the yuan will weaken if Donald Trump wins the U.S. elections in November partly because he has promised to raise tariffs on Chinese imports, Skandinaviska Enskilda Banken analysts Andreas Johnson and Per Hammarlund wrote in a note last week.

The People’s Bank of China’s yuan positions -- which reflect the amount of foreign currency held on its balance sheet -- fell by 337.5 billion yuan ($50 billion) in September, according to data released by the monetary authority on Tuesday. The decline, the biggest since January, suggests that the central bank may have sold foreign exchange to support the yuan.

In the money markets, the PBOC pulled a net 10 billion yuan, after draining 174.5 billion yuan on Monday, data compiled by Bloomberg show.

The overnight repurchase rate, a gauge of interbank funding availability, rose for a sixth day, adding 10 basis points to 2.25 percent, according to weighted average prices. The one-week rate surged 12 basis points to a two-week high of 2.45 percent, while the 14-day cost climbed 52 basis points to 3.03 percent.

Government bonds declined, with the 10-year yield rising one basis point to 2.70 percent, according to National Interbank Funding Center prices.

— With assistance by Tian Chen

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