Yuan falls for third day in a row on worries over proposed tax

All eyes on Fed statement for hints on US interest rates

PUBLISHED : Wednesday, 16 March, 2016, 2:48pm
UPDATED : Wednesday, 16 March, 2016, 2:48pm

Yuan fell for a third consecutive day on Wednesday, with the market still worried about a proposed new tax to curb currency speculation and the central bank fixing the yuan reference price weaker for the third day in a row.

Offshore yuan traded in Hong Kong and overseas markets weakened to 6.5187 to the US dollar on Wednesday morning before bouncing back to 6.5181 at 1.30pm , down 0.14 per cent from Tuesday when it weakened by 0.28 per cent.

The currency had its largest single-day fall in a month on Tuesday after reports Beijing was planning to introduce a “Tobin tax” to curb speculation. The tax takes its name from Nobel laureate economist James Tobin, who in 1972 suggested taking a cut of foreign exchange trades to limit currency speculation.

Stephen Innes, senior FX trader at OANDA, said the Tobin tax proposal had become the focus of the market.

China fix fallout weighed negatively across the Asia-Pacific currencies
Stephen Innes, OANDA

“The big news out of mainland China was its Tobin tax proposal. This would slap a tax on currency transactions in an effort to curb speculation against the yuan,” Innes said. “A move like that in my mind will undermine China’s attempts to get the yuan fully accepted in the financial markets. And while it may offer some short-term stability or buffer to curb capital outflow, it will likely cripple the yuan’s aspirations for internationalisation.”

The People’s Bank of China (PBOC) set the yuan mid-price at 6.5172 on Wednesday morning, weaker by 93 basis point from Tuesday when it was weaker by 166 basis point. It set the mid-price 8 basis point weaker on Monday after surprising the market by setting it stronger by 222 basis points on Friday, at the strongest level this year. The currency is allowed to be traded 2 per cent up or down the mid-price set by the PBOC.

Innes said the PBOC’s weaker fixing caught the market’s attention.

“This has sparked some fear-mongering that the PBOC may start to weaken the yuan gradually after this weekend’s data which again sparked global growth concerns,” he said. “There was a surge in US dollar demand in the wake of yesterday’s fixing as the market was a bit spooked. China fix fallout weighed negatively across the Asia-Pacific currencies.”

Onshore yuan fell to 6.5181 to the US dollar at 1.30pm, down 0.1 per cent from Tuesday when it was down 0.19 per cent.

The onshore and offshore yuan have fallen this week after hitting their strongest levels this year on Friday, when they rose alongside the euro after the European Central Bank hinted on Thursday that it would not cut interest rates further. Innes said traders widely believed the United States would not increase interest rates this week, but they were all waiting on the statement to be given by the US Federal Reserve for hints on the likelihood of near-term US rate increases.

The PBOC set the yuan mid-price against the euro at 7.2331, weaker by 159 basis points; against 100 yen at 5.7581, weaker by 411 basis points; and at 9.2181 against the pound, stronger by 709 basis.

The Hong Kong dollar traded at 7.7610 at 1.30pm on Wednesday, unchanged from Tuesday.