Offshore Yuan Near 7 a Dollar on Quota Reset Concern, Trump Bets

  • China cuts dollar weighting in currency basket, adds 11 more
  • PBOC to guide market via fixings, won’t let 7 be hit soon: ANZ

The offshore yuan inched lower toward 7 per dollar, widening its discount to the onshore rate to the most in more than two weeks, as traders sold the currency on bets it would face stronger depreciation pressures as the year turns.

China’s currency traded in Hong Kong dropped as much as 0.23 percent to 6.9873 per dollar Thursday. The offshore yuan’s discount to the onshore exchange rate, seen as a gauge of traders’ bearishness on the currency, expanded to the most since Dec. 13 on an intraday basis.

The onshore yuan is headed for its steepest annual plunge in more than two decades, and when the year turns, policy makers will be faced with a triple whammy of the renewal of citizens’ $50,000 quota of foreign-currency purchases, prospects of further Federal Reserve interest-rate increases, and concern that U.S. President-elect Donald Trump may slap punitive tariffs on China’s exports to the world’s largest economy.

"It’s only a matter of time for the yuan to hit 7 per dollar but the PBOC won’t likely let that happen in the very short term, because that would hurt confidence and add even more pressures on the currency," said Irene Cheung, Singapore-based foreign-exchange strategist at Australia & New Zealand Banking Group Ltd. "The central bank has been guiding the market with fixings that are consistently stronger than our model shows, and it will likely keep doing so to soothe sentiment."

As the yuan extended losses against the greenback, China cut the weighting of the dollar in its currency basket and added 11 more currencies. The dollar will fall to 22.4 percent from 26.4 percent in the trade-weighted basket from Jan. 1, China Foreign Exchange Trade System said in a statement Thursday. Additional currencies will include the South Korean won and the South African rand, it said.

Policy makers have set stronger-than-expected fixings and tightened capital controls to prevent the yuan from entering a vicious cycle of sharper depreciation and faster fund exodus. The People’s Bank of China has stepped up efforts to guide expectations on the exchange rate, Ma Jun, chief economist at the monetary authority’s research bureau, said last week.

Only one out of 16 strategists surveyed by Bloomberg last month expected the currency to hit 7 per dollar this year. There’s a 63 percent chance for the Chinese exchange rate to reach this level by the end of the first quarter of 2017, more than quadrupling the probability seen three months ago, options prices show. The currency will end 2017 at 7.15, according to analysts’ median forecast in a separate Bloomberg survey.

The offshore yuan trimmed losses within an hour during morning trading and was down 0.1 percent at 6.9779 per dollar as of 5:35 p.m. in Hong Kong. The currency in Shanghai advanced 0.02 percent to 6.9548.

— With assistance by Tian Chen

Before it's here, it's on the Bloomberg Terminal.