China’s yuan slumps against the dollar
China’s yuan on Monday fell to the lowest in a month, with bankers anticipating the currency to depreciate more against the US dollar this year amid weak economic data and uncertainties over its inclusion in a list of reserve currencies.
Onshore yuan closed on Monday at 6.3619, down 0.14 per cent from the Friday close. It was the lowest in a month and the weakest since September 29.
Heng Koon-how, senior foreign exchange strategist at Credit Suisse, said the softening in yuan was caused by weak economic data in mainland China and the uncertainty over it making it to the Special Drawing Rights (SDR) of the International Monetary Fund. The SDR basket of elite currencies is currently made up of the euro, yen, US dollar and pound.
“The onshore yuan weakness this week is because of growing disappointment over the slow progress in the IMF’s SDR review process. It is still uncertain when the IMF’s executive committee will meet to decide on this. And with each day’s delay, the market gets more impatient,” Heng said.
“On top of this, the weak set of October trade figures for China has added to expectations of further monetary easing by the People’s Bank of China. We cannot rule out yet another round of reserve requirement ratio and interest rate cuts before the end of the year. This has put pressure on the yuan as well.”
Heng said onshore yuan is likely to drift towards 6.40 against the US dollar and may go even weaker if the SDR vote is delayed till next year.
“We still see mild CNY (onshore yuan) weakness towards 6.60 over the next 12 months,” Heng said. “Depreciation pressure on the CNY has returned yet again. This is clear from the renewed widening in the spread between onshore and offshore yuan.”
The spread now stands at about 300 basis points.
Offshore yuan also traded lower at 6.3921, down 0.02 per cent from Friday’s close, the lowest in two weeks. The PBOC on Monday morning set the reference rate of the yuan against the dollar at 6.3578, weakening it by 119 basis points from Friday’s fixing. The currency is allowed to move two per cent in either direction around the reference rate.
Forwards for both onshore and offshore yuan have weakened further past the 6.50 level and towards 6.55, indicating a weak outlook.
The yuan will be under fresh, mild depreciation pressure once the IMF unveils its decision on the SDR basket, DBS economist Nathan Chow said.
“Expectation for further depreciation rests with economic fundamentals, which continue to show no signs of improvement,” he said.
A DBS quarterly survey tracking Hong Kong’s small and medium-sized enterprises’ use of yuan released on Monday showed that business needs for the currency – such as in pricing orders, invoicing and settling cross-border transactions – are tipped to decline in the short term.
Half of the respondents, consisting of 211 companies with annual turnover at HK$1 million or above, said they expected the yuan to depreciate by 2 per cent or more over the next 12 months.
Chow said SDR inclusion, or not, will have no bearing on companies’ decision to use the currency.
DBS expects the currency to trade at 6.42 against the greenback by year-end and at 6.52 in the third quarter next year.