Reports of plan for new tax on foreign exchange transactions sends offshore yuan lower

Central bank sets mid-price weaker

PUBLISHED : Tuesday, 15 March, 2016, 1:02pm
UPDATED : Tuesday, 15 March, 2016, 6:50pm

The yuan fell the most in a month on Tuesday after the US dollar bounced back and reports the People’s Bank of China was planning a new tax on foreign-exchange transactions to curb speculation.

Offshore yuan traded in Hong Kong and overseas markets weakened to a low of 6.5099 to the US dollar on Tuesday afternoon before bouncing back to 6.5092 at 6pm, down 0.26 per cent from Monday when it weakened by 0.16 per cent. Tuesday’s drop was the biggest single-day fall since February 16. The fall in the past two days came after the currency hit a three-month high on Friday at 6.4728.

DBS economist Nathan Chow said that if Beijing implemented a “Tobin tax” to curb speculators, it would affect the yuan’s progress towards internationalisation.

“The tax takes its name from Nobel laureate economist James Tobin, who in 1972 suggested taking a cut of forex trades to limit currency speculation,” Chow said. “While the idea is good if policymakers consider financial stability alone, it becomes less attractive when taking into account financial competitiveness.

If the US Fed meeting on Wednesday hints at an interest rate rise in June or so, it would help the US dollar to strengthen against the other currencies
Tommy Ong, DBS Hong Kong

“As a result of the financial tax, investors might invest in other countries that have lower transaction costs, according to international experiences. Imposing a tax on forex trading would also complicate Beijing’s yuan internationalisation and market reforms.”

The PBOC set the mid-price at 6.5079 on Tuesday morning, weaker by 166 basis points from Monday, when it was set 8 basis points lower. The currency is allowed to be traded 2 per cent either side of the mid-price.

Onshore yuan fell to 6.5130 to the US dollar at 6pm, down 0.22 per cent from Monday. also the biggest single-day fall since February 16. The currency, traded by mainland traders, was down 0.07 per cent on Monday after hitting a two-month high on Friday at 6.4879.

Tommy Ong, managing director of treasury and markets at DBS Hong Kong, said the US dollar had bounced back against all other currencies from Monday afternoon.

“The yen, euro and yuan all fell against the US dollar, which has bounced back after falling since Thursday,” he said. “The yuan trading trend will depend on the US dollar. If the US Fed meeting on Wednesday hints at an interest rate rise in June or so, it would help the US dollar to strengthen against the other currencies and the yuan would fall as well.”

But, Ong said, if the US Fed hinted that rates would not rise anytime soon, the US dollar would soften and that would help the yuan stabilise at the current level.

‘There is no foundation for the yuan to go much stronger as the export and other economic data remains weak,” he said.

The yuan strengthened against the US dollar late last week, along with the euro, after European Central Bank president Mario Draghi hinted on Thursday that the ECB might be done with additional easing measures for now.

On Tuesday morning, the PBOC set the yuan mid-price against the euro at 7.2172, stronger by 285 basis points; against 100 yen at 5.7170, weaker by 100 basis points; and at 9.2890 against the pound, stronger by 462 basis.

The Hong Kong dollar traded at 7.7590 to the US dollar at 6pm on Tuesday, weaker by 0.01 per cent from Monday and putting an end to three days of rises. The local currency hit the strongest level since mid-January at one stage on Monday.