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Yuan

China’s yuan drifts lower after PBOC sets daily fix at five-year low

Onshore yuan weakens to its lowest level in over four months

PUBLISHED : Monday, 30 May, 2016, 2:11pm
UPDATED : Wednesday, 01 June, 2016, 3:09pm

China’s yuan fell to a four-month low on Monday after the central bank set the fixing at the weakest level in five years, as the US dollar strengthened after a hawkish speech by Federal Reserve Chairwoman Janet Yellen in which she signalled an interest rate rise in coming months.

Market watchers said a weaker yuan would add pressure to capital outflows because more organisations would sell yuan and buy US dollars to hedge against their currency risk.

While the US dollar is expected to maintain its strength until the Fed meeting in mid June, a big devaluation of the yuan is unlikely, analysts said.

The People’s Bank of China (PBOC) on Monday set the yuan reference point against the US dollar at 6.5784, down 294 basis points, or 0.4 per cent, than the fixing on Friday. The reference point is now at its lowest level since February 2011.

Traders are allowed to deal up to 2 per cent either side of the reference point for the day.

Onshore yuan in Shanghai at one point hit 6.5825 per dollar on Monday, the lowest level in four months. Offshore yuan in Hong Kong fell 130 pips to a three and half month low.

So far this month, the yuan has weakened 1.65 per cent against the US dollar, the biggest monthly drop since last August when the PBOC shocked the world with a 1.9 per cent devaluation.

The PBOC’s fixing came after the US dollar index climbed to a two-month high on Friday, after Yellen said in a speech at Harvard University that an interest rate increase in coming months would “probably” be “appropriate” given that the country’s economy continues to strengthen.

“The fixing mainly reflects the strength of the US dollar…a basket of currencies that the yuan tracks have dropped against the dollar last Friday,” said Jasper Lo, chief executive of King International.

Although a weakening trend in the yuan is expected, market watchers said a large devaluation of the “redback” is unlikely.

“The US dollar will maintain strength in the short term, but it has reflected the anticipation of an interest rate hike,” Lo said. “The greenback will possibly decline after the Fed meeting in mid June, no matter whether it decides to raise the rate or not.” He expects the yuan to maintain its path of gradual depreciation.

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