Yuan rises sharply to 10-week high on Fed rate pause but Hong Kong still warns of rise risks

PUBLISHED : Thursday, 17 March, 2016, 2:28pm
UPDATED : Monday, 27 June, 2016, 11:51am

The yuan rose sharply on Thursday after the Federal Reserve’s downward revision of its expectations for interest rate increases sent the US dollar down against other currencies, but Hong Kong’s central bank continued to warn of rate rise risks.

Holding the rates unchanged, the Fed on Wednesday projected only two quarterly rate increases were on the cards this year rather than the four it had predicted last year.

“Nonetheless, we noted that recent data pointed to continued improvement in the US labour market and rising core inflation. Therefore, there remain considerable uncertainties associated with the pace of future rate rises in the US. We still have to be cautious about the risks arising from increases in US interest rates,” Norman Chan Tak-lam, chief executive of the Hong Kong Monetary Authority, said in a statement on Thursday.

The Fed’s decision pushed down the dollar against the euro, the yen, the Australian dollar and other Asian currencies while helping both the yuan and the Hong Kong dollar shoot up.

The onshore yuan, which was not trading at the time of the Fed’s announcement on Wednesday as the market was closed, caught up with its offshore counterpart on Thursday to trade at a 10-week high of 6.4821 in evening trade, up 0.57 per cent from Wednesday, the biggest single-day gain in one month.

The offshore yuan hit a one-week high at 6.4789 on Thursday evening, extending the gain from Wednesday night to advance 0.42 per cent, the biggest single-day gain in two weeks.

The Hong Kong dollar also rose to 7.7555 on Thursday afternoon, its strongest level since mid-January.

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

The People’s Bank of China set the yuan’s midprice at 6.4961 on Thursday, up 211 basis points or 0.32 per cent from Wednesday, after setting it lower in the previous three days. The currency is allowed to trade 2 per cent in either direction of the midprice.

“The Fed’s citing of risks to global economic growth that have spurred monetary easing in China, Europe and Japan over the past two months shows the US has adopted a dovish stance. This drove all other currencies up, including the yuan,” said Andrew Fung, executive director of Hang Seng Bank.

The Fed also lowered its forecast for interest rates for the next two years, with the target rate now set at 1.9 per cent by the end of 2017 and 3 per cent in 2018.

In December, the US increased the interest rates for the first time in a decade. The current target rate stands at between 0.25 per cent and 0.5 per cent.

READ MORE: China’s yuan see-saws against US dollar

Thursday ended the three-day losing streak for the yuan, with the market still worried about a proposed new tax to curb currency speculation. The currency saw its largest single-day fall in a month on Tuesday after reports that Beijing planned to introduce a “Tobin tax” to curb speculation.

Fung, however, said he believed China was unlikely to introduce such a tax. “I believe the PBOC only plans to do so in situations when the yuan faces serious attacks from speculators,” he said.

The tax takes its name from Nobel laureate James Tobin, who in 1972 suggested a charge on foreign-exchange trades to limit currency speculation.