Yuan falls for second day after mainland China’s central bank sets mid-price lower

Onshore yuan trading at 21 basis point premium to offshore yuan

PUBLISHED : Wednesday, 17 February, 2016, 3:09pm
UPDATED : Wednesday, 17 February, 2016, 3:09pm

Both onshore yuan and offshore yuan extended falls early on Wednesday afternoon, dropping for the second day in a row after the People’s Bank of China (PBOC) set the mid-price lower in the morning.

Onshore yuan traded by mainland traders fell to 6.5263 per US dollar in early trade on Wednesday before bouncing back to trade at 6.5256 per US dollar at 1.30pm, down 0.16 per cent from Tuesday when it lost 0.32 per cent.

The currency rose 1.17 per cent on Monday to a two-month high of 6.4870 in the strongest single-day jump since the yuan unpegged from the US dollar in 2005.

So far this year the onshore yuan is down just 0.52 per cent against the US dollar, narrowed from a depreciation of 1.52 per cent last month.

Offshore yuan traded by international investors fell to 6.5373 on Wednesday morning before bouncing back to 6.5277 at 1.30pm, down 0.16 per cent from Tuesday, when it fell 0.28 per cent and put an end to a five-day rising streak. The currency has hit three-month high on Monday. The offshore yuan has now risen 0.62 per cent against the US dollar this year, after depreciation of 2 per cent in the first week of the year.

Over the medium term, I expect ongoing gradual depreciation of offshore yuan as broader US dollar momentum and appetite grows
Stephen Innes, Oanda

The PBOC set the mid-price weaker by 107 basis points on Wednesday morning at 6.5237, after setting it lower by 12 basis points on Tuesday. On Monday, the PBOC fixed the mid-price stronger by 196 basis points or 0.3 per cent from February 5, the last trading day before the weeklong Lunar New Year holiday, when trading in onshore yuan was shut.

Traders are allowed to trade 2 per cent above or below the mid-price.

Stephen Innes, senior trader at Oanda, said the PBOC fixing on Wednesday did not mean the central bank would like to see the yuan depreciate substantially.

“The fixing this morning shows the PBOC will tolerate greater flexibility in the fix and not an overt message that the PBOC is moving forward with aggressive devaluation,” he said. “Although markets initially reacted risk off to this morning fix thinking the latter, it was nothing more than a knee-jerk reaction.

“By all accounts, regional equity markets are looking stable, and if this holds true, we would expect greater flexibility within the fixing mechanism. However, given the proximity of the G20 finance ministers meeting, I anticipate policy will remain relatively stable but over the medium term, I expect ongoing gradual depreciation of offshore yuan as broader US dollar momentum and appetite grows.”

The onshore yuan rally on Monday was to catch up with the offshore yuan, which was traded last week, rising 0.93 per cent. PBOC governor Zhou Xiaochuan was quoted over the weekend as saying that China was not pursuing any large devaluation of the onshore yuan. That eased market concerns of any large devaluation risks.

The Hong Kong dollar was trading at 7.7882 to the US dollar at 1.30pm, stronger by 0.03 per cent from Tuesday.

The onshore yuan was trading at a 21 basis point premium to the offshore yuan on Wednesday. On January 7, the spread stood at a record 1,400 basis points.

The PBOC set the mid-price for the yuan at 7.2525 against per euro on Wednesday, stronger by 177 basis points, while it set the mid-price per 100 yen at 5.7014, weaker by 175 basis points. It set the midprice against the pound at 9.3166, stronger by 778 basis points.