China’s yuan drops to a five-year low ahead of US Fed rate meeting
Currency being guided lower by central bank to mitigate risks of a rate rise and amid uncertainty over Britain’s decision on EU membership
China’s yuan currency dropped to its lowest in five years against the US dollar on Wednesday morning, with the central bank setting the reference price down ahead of a decision by the US Federal Reserve on interest rates.
Onshore yuan traded at 6.6043 on Wednesday morning, the lowest since January 14, 2011 when it touched 6.6367. The currency later bounced back to 6.5945 by 11.30am. The onshore yuan has dropped three days in a row, losing a total of 0.7 per cent this week.
The People’s Bank of China set the yuan reference point at 6.6001, the weakest in five years and 0.31 per cent or 210 basis points lower than Tuesday’s setting.
“The PBOC is guiding this path of gradual depreciation with expectations that the US Federal Reserve will start on the road of interest normalisation sooner than later,” said Stephen Innes, senior trader at OANDA Asia Pacific.
“Traders will be closely monitoring the close at weeks end, and if the market stays north of US dollar against the offshore yuan at 6.60 it will be hugely important for a technical perspective and could instigate a push higher similar to the last major breakout before the end of 2015.”
Innes said there would be “snowball effect in play” as a higher US dollar interest rates, weaker yuan fix and accelerating mainland capital outflows may lead the yuan to go further down to 6.75.
A rise in US rates could cause money to flow out of China in search of higher returns in the US. Higher US rates could also hurt some Chinese companies with heavy US-dollar denominated borrowings.