Yuan Trades Near Eight-Year Low as PBOC Weakens Reference Rate

  • Defending currency now would burn foreign reserves, ANZ says
  • Offshore currency’s discount to onshore widest in two weeks

The yuan touched an eight-year low as China’s central bank weakened its daily reference rate, stoking speculation policy makers will tolerate further depreciation amid a rally by the dollar.

The People’s Bank of China cut its fixing by 0.26 percent to 6.9085 per dollar, after a gauge of the dollar’s strength surged to the highest level in more than a decade overnight. That’s the first time since June 2008 the central bank set a reference rate that’s weaker than 6.9. The yuan strengthened 0.06 percent at 5:15 p.m. local time after falling as much as 0.1 percent.

"There’s no point to defend the yuan at 6.9 per dollar now, as it just burns out their reserves and the offshore rate is already trading around 6.95," said Khoon Goh, head of Asia research at Australia & New Zealand Banking Group Ltd. "But we should see some retracement in the dollar post the U.S. Federal Reserve hike, as that has been fully priced by the market. So that could see the yuan recover into year-end."

So far, there’s little sign of the pace of declines lessening. The exchange rate weakened from 6.8 per dollar to 6.9 in just two weeks, after taking a month to fall from 6.7 to 6.8. Before then, the currency spent nine months trading between 6.45 and 6.7. The greenback has rallied amid speculation U.S. President-elect Donald Trump’s reflationary economic policies will trigger faster monetary tightening. Falling past 7 per dollar will fuel sharper depreciation pressures, according to Standard Chartered Plc.

The offshore yuan’s discount to the onshore rate widened to more than 0.6 percent, the widest gap in two weeks, before narrowing to 0.4 percent. A Bloomberg replica of the CFETS RMB Index, which tracks the yuan versus 13 exchange rates, is at the highest level since August as the currency gains against other peers.

"There’s a higher chance for us to see the emergence of the arbitrage trade of buying cheaper offshore yuan and selling it onshore, which could push the domestic rate weaker," said Ken Cheung, a Hong Kong-based Asia currency strategist at Mizuho Bank Ltd.

— With assistance by Tian Chen

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