image

Yuan

China’s yuan falls the most in seven weeks as US dollar bounces back

Cyclical drivers for the yuan still negative as China pursues painful supply-side structural reforms, say traders

PUBLISHED : Monday, 21 March, 2016, 2:25pm
UPDATED : Monday, 27 June, 2016, 11:51am

The yuan saw its biggest single-day fall in seven weeks on Monday as the US dollar bounced back ahead of the Easter holiday.

Offshore yuan fell to 6.4835 to the US dollar in early afternoon, down 0.34 per cent from Friday, its biggest drop since February 1. It bounced back at 6.4778 in evening trade but still down 0.26 per cent.

The currency hit a four-month high at 6.4816 on Friday, rising 0.33 per cent last week.

The People’s Bank of China fixed the reference rate of the yuan against the US dollar 0.3 per cent, or 196 basis points, lower from Friday, when the central bank had set the mid price 0.5 per cent stronger. The currency is allowed to trade up to 2 per cent on either side of the reference rate set by the central bank.

Jasper Lo Cho-yan, chief executive of King International Financial, said the yuan’s steep drop came on the back of a rebound of the US dollar, which was oversold last week.

Yuan swoons to near three-week low after Moody’s downgrades China debt outlook to ‘negative’

“After its sharp fall on Thursday and Friday, the US dollar was oversold and bounced back by about 1 per cent against most other currencies over the weekend. This has led the yuan to fall alongside other currencies vis-a-vis the US dollar,” Lo said.

“Many traders bought the US dollar to wind up their positions before the long Easter holiday from Friday. This also supported the US dollar.”

Heng Koon-how, senior investment strategist of Credit Suisse, remains negative on the outlook for the yuan, which is also called renminbi.

“With cyclical drivers for the yuan still negative as China pursues painful supply-side structural reforms, the US dollar strength could resume in coming months as the yuan starts to weaken

again. This may trigger fresh weakness in Asian currencies,” Heng said.

Many traders bought the US dollar to wind up their positions before the long Easter holiday from Friday. This also supported the US dollar
Jasper Lo Cho-yan, chief executive, King International Financial

The short-term yuan rally last week came after the US dollar fell against most currencies by 1 to 2 per cent last Thursday and Friday following Federal Reserve chairwoman Janet Yellen’s decision to keep interest rates unchanged and slow down rate hikes this year.

Lo said although the dovish stance of the Fed led to a softening of the dollar, the yuan also lacks fundamentals for a rally. He said he believes the yuan would continue to fall against the US dollar this week.

Onshore yuan was down 0.27 per cent at 6.4863 in afternoon trade on Monday, also reversing course from Friday when it had its biggest single-day jump in a month. The currency once hit a three-month high at 6.4595 to the US dollar on Friday morning. It bounced back to 6.4811 in the evening, still down 0.2 per cent.

The Hong Kong dollar rose to 7.7537 against the greenback on Monday, nearing this year’s strongest level of 7.7503.