China's Yuan Drops Off Nine-Month High as Gains Seen Overdone

  • Decline doesn’t mean appreciation trend has changed: analyst
  • Cost of bearish offshore yuan options lowest since 2014

The yuan slipped off a nine month-high amid speculation a seven-day advance was excessive.

The currency declined 0.11 percent to 6.7550 per dollar as of 5:02 p.m. in Shanghai. It gained 0.9 percent in the last seven sessions, rising to the strongest level since October late Tuesday as the greenback fell and China’s economy showed signs of growth. The dollar’s 14-day relative-strength index against China’s exchange rate dropped below the 30 threshold that indicates to some traders that the U.S. currency will strengthen.

“The yuan is dropping because of profit-taking, and this doesn’t mean the currency’s appreciation path in the medium term is reversed," said Kenix Lai, a Hong Kong-based foreign-exchange analyst at Bank of East Asia Ltd. "The yuan will likely test 6.7 per dollar in the second half of this year, as the dollar is set to weaken more and China’s economy keeps improving."

The offshore yuan retreated 0.08 percent to 6.7556 per dollar, after gaining 0.8 percent in the last six days. The Bloomberg Dollar Spot Index advanced 0.1 percent, after tumbling 1.8 percent in seven days.

The extra cost of bearish options on the offshore yuan over bullish contracts fell to 0.34 percent Tuesday, the lowest since January 2014, according to three-month risk reversal prices compiled by Bloomberg. That suggests traders are now less interested in betting on yuan declines.

— With assistance by Tian Chen, and Justina Lee

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