Yuan hits three-week low and worst week in months amid US dollar rally on expectations that rate rise may come sooner

Yuan and other currencies may head south next week

PUBLISHED : Friday, 25 March, 2016, 12:58pm
UPDATED : Friday, 25 March, 2016, 6:40pm

The yuan fell for the sixth day in a row on Friday to hit a three-week low and posted its biggest weekly fall since January 8 as the US dollar rallied this week against all major currencies after official comments indicated that a US interest rate increase may come earlier than expected.

Offshore yuan fell to a three-week low at 6.5290 to the US dollar Friday afternoon, down 0.10 per cent from Thursday when it had fallen 0.23 per cent. The currency bounced back to 6,5212 at 6 pm.

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The yuan has lost 0.93 per cent this week, the biggest weekly fall since the week of January 8 when it was down 1.72 per cent. That prompted the People’s Bank of China to intervene and prop up the yuan. This week’s performance also ended the previous three-week rising streak.

The yuan’s fall this week is in line with other major currencies trading weaker against the US dollar, with the pound down 2.5 per cent this week against the dollar, the Japanese yen down 1.39 per cent and the euro declining 1 per cent.

The declines have erased most of the gains to the greenback made in the previous week when the US dollar fell sharply after US Fed chair Janet Yellen kept interest rates unchanged on March 16, with expectations that US rates would only increase two times this year instead of four as predicted in December.

Stephen Innes, a senior trader with Oanda, said the US dollar rally this week came after the market began to believe the next interest rate rise may come earlier than expected.

“Despite Yellen’s distinctly dovish forward guidance, which had everyone convinced that perhaps even two US rate hikes was a stretch in 2016, early this week a few highly regarded Fed members were quoted on the wires expressing an entirely different perspective from Yellen’s comments, which came [after] the FOMC press conference. The comments made this week were more hawkish towards the Fed nest,” Innes said.

Capital outflows will be a concern along with China’s struggling economy
Stephen Innes, senior trader, Oanda

He believes the long-term prospects for the yuan remain weak but it is unlikely to see a sharp fall as the government is keen on keeping the currency stable.

“Capital outflows will be a concern along with China’s struggling economy. While early signs indicate the numerous macro-prudential measure put in place last year are taking hold, it is still too early to declare the programmes as successful,” Innes said.

He cited Premier Li Keqiang who stated on Thursday at the annual Boao Forum for Asia that the Chinese mainland economy was off to a great start in 2016, and suggested that China has many tools in its policy arsenal to turn the economy around.

“As talk of yuan devaluation fades, I expect calm ... as central banks do their best to dampen foreign exchange volatility,” Innes said.

Jasper Lo Cho-yan, chief executive of King International Financial, said the yuan and other currencies may head south next week.

“The US dollar rally is likely to continue. There are several Federal Reserve officials who hinted the next rate rise may come soon and market expects this may happen in April. This has lent support to the US dollar and hurt the yuan and other currencies,” Lo said.

The People’s Bank of China on Friday fixed the reference rate for the yuan at 6.5223 to the US dollar, weaker by 0.11 per cent or 73 basis points from Thursday’s level, when it set it 0.33 per cent weaker.

Onshore yuan also fell for the fifth day in a row on Friday morning, down 0.12 per cent from Thursday at 6.5202. The currency has fallen 0.78 per cent this week, the biggest weekly fall since January 8 when it saw a depreciation of 1.56 per cent.

The Hong Kong dollar edged down 0.01 per cent to 7.7587 against the greenback on Friday.