Yuan in more volatile trading as IMF review approaches

PBOC raises yuan mid-price the most in a decade, yet currency sees wild swings

PUBLISHED : Monday, 02 November, 2015, 12:03pm
UPDATED : Monday, 02 November, 2015, 9:42pm

The yuan fell steeply even after the central bank raised the daily reference the most in a decade, in an indication of the volatility the currency is poised to experience ahead of a crucial review by the International Monetary Fund this month that will determine if it makes it to an elite club of reserve currencies.

The People’s Bank of China fixed the yuan mid-price 341 basis points, or 0.54 per cent, stronger at 6.3154 against the US dollar yesterday, the biggest daily jump since July 2005. But onshore yuan, or CNY, shrugged off the central bank support and closed 0.32 per cent lower at 6.3379.

The currency had at one point fallen up to 0.45 per cent, the biggest intraday swing since the fixing mechanism was modified in August resulting in a shock devaluation.

Offshore yuan, or CNH, also fell by 0.41 per cent to 6.3459 as of 7pm.

Gerrard Katz, Asia FX head at Scotiabank, said yesterday’s depreciation was a result of increasing US dollar hedging demand from Chinese and foreign companies.

“There’s been quite a lot of US dollar demand for corporate hedging after the stronger yuan fixing against the dollar this morning, as expectations built up that the dollar will strengthen towards year-end. The market is becoming more volatile than we’ve seen recently. It will probably move up towards the 6.35-6.36 range in both the CNY and CNH,” he said.

The yuan made its biggest one-day gain against the dollar in more than 10 years in onshore markets on Friday. The CNH closed sharply higher with a 400 basis points spike that day, bridging the gap with CNY. The two continued to move in lockstep for much of Monday.

Analysts said the renminbi is set for greater two-way flexibility as long as the onshore and offshore rates move hand in hand, something that the IMF would welcome.

“I wouldn’t read too much into single-day moves because the PBOC did say we need to get used to two-way flexibility,” said Koon How Heng, senior currency strategist at Credit Suisse.

“I’m not so worried about the spot rate, as long as the CNY-CNH spread is within a tight range. There is still a depreciation bias at the back-end, as shown in the forwards market.”

The one-year non-deliverable forward, an indication of future rate direction, was trading around 6.50.

A substantial gap between the CNY and CNH was one of the issues highlighted by the IMF in its August report on the renminbi’s application to join the Special Drawing Rights basket, which now consists of the dollar, euro, pound and the yen. The IMF is due to make a decision this month on whether to include yuan.

“More two-way volatility is something that China is comfortable with as the IMF decision approaches,” Katz said . “What’s more important is CNY and CNH have been aligning, whenever one or the other moves sharply, we will see some Chinese banks moving the market to bridge the gap.”