Yuan in Biggest Weekly Tumble Since January Amid Trump Concerns

  • Dollar advance adds pressure as Fed on brink of raising rates
  • Currency pares declines amid intervention speculation

The yuan headed for the biggest weekly decline in 10 months, weighed down by the unknowns of a Donald Trump presidency amid concern that any overt central bank intervention would provide the Republican more ammunition to brand China a currency manipulator.

The currency fell as much as 0.3 percent to 6.8950 against the greenback Friday, the weakest level since June 2008 and beyond a Bloomberg survey’s year-end median estimate of 6.8. That extends its decline in the past five days to 1.2 percent, the most since policy makers roiled global markets by setting a series of unexpected yuan fixings in January that investors saw as market-meddling.

The People’s Bank of China has allowed the yuan to weaken by cutting its daily reference rate for the past 11 days, the longest downward run in data going back to June 2005. This is in contrast to the August-September period, when policy makers were suspected of propping up the currency before its entry into the International Monetary Fund’s reserves basket. The situation has changed now, with Trump’s win and the Federal Reserve on the brink of raising interest rates.

“It does appear that the authorities are trying to manage expectations amid fears of Trump making good on his anti-China threats,” Julian Wee, a Singapore-based senior market strategist at National Australia Bank Ltd., said in an interview this week. “I think the authorities will continue to manage both the yuan basket and the offshore-onshore yuan spread as tools for managing expectations.”

Basket Moves

While the yuan has advanced 0.9 percent against a 13-currency trade-weighted index since Trump’s victory, Goldman Sachs Group Inc. warned that investors are more focused on its moves against the greenback. A gauge of dollar strength posted the biggest four-day rally in seven years following the victory by Trump, who has promised to label China a currency manipulator and slap tariffs on the nation’s exports. The odds of Fed tightening this year are now at 96 percent, with Chair Janet Yellen signaling an interest-rate increase could be imminent.

“The only signal that matters is dollar-yuan,” Goldman analysts wrote in a note Thursday. “Beyond the usual reasons for wanting to hedge exposure to China risk, we think it will also hedge the risk of a Trump trade tantrum.”

The yuan was trading down 0.24 percent at 6.8882 per dollar as of 5:30 p.m. in Shanghai, according to China Foreign Exchange Trade System prices. The currency saw a sudden surge before the 4:30 p.m. official close, which is used as a factor to set the next day’s fixing. The offshore yuan fell as much as 0.12 percent to a record-low 6.9125.

“The PBOC may think the recent depreciation pace has come a bit too fast,” said Irene Cheung, a foreign-exchange strategist at Australia & New Zealand Banking Group Ltd. in Singapore. “It’s not surprising to see the yuan suddenly strengthening before the official closing as it helps to decide the next day’s fixing.”

Declines Predicted

The Chinese currency will weaken to 7 against the greenback -- a level unseen since before the global financial crisis -- in the first half of next year, according to 14 of 16 analysts and traders surveyed by Bloomberg this week. Ten said policy makers may refrain from propping up the yuan, with Royal Bank of Scotland Group Plc citing the nation’s shrinking foreign-exchange reserves. Mizuho Securities Asia Ltd. said the level could be breached this year, while Oversea-Chinese Banking Corp. sees it happening possibly in January.

A record $44.7 billion left China in September in yuan payments, while the nation’s foreign-exchange stockpile shrank last month by the most since January. Chinese officials have taken a series of steps to plug capital control loopholes, such as a potential plan to curb transactions that use the bitcoin digital currency to take funds out of the country.

"The near-term focus from here is squarely on the December Fed meeting and whether they hike,” said Sue Trinh, head of Asia foreign-exchange strategy at RBC Capital Markets in Hong Kong. "Seven is the psychological level from here.”

— With assistance by Robin Ganguly, Helen Sun, and Justina Lee

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