image

Yuan

Yuan dips further, shrugging off PBOC’s strong fixing, as pound reverses recent gains

Yuan continues to plumb five and a half year lows despite a stronger fixing by the central bank, as pound falls again after rising nearly 1 per cent on Tuesday

PUBLISHED : Wednesday, 29 June, 2016, 11:27am
UPDATED : Wednesday, 29 June, 2016, 11:27am

Chinese yuan continued its depreciation despite the central bank’s move to strengthen the fixing for the first time since the UK’s Brexit vote, while the British pound weakened again after rising nearly 1 per cent on Tuesday.

Onshore yuan in Shanghai shed 0.12 per cent or 77 basis points to 6.6527 against the US dollar as of 9.56am, and at one stage hit 6.6539 per dollar, a fresh five and a half year low.

The offshore yuan in Hong Kong strengthened, up 0.1 per cent or 66 pips to 6.6767, one of the strongest levels since Britain’s vote to leave the European Union.

The People’s Bank of China on Wednesday set the yuan reference point against the US dollar at 6.6324, 204 basis points or 0.3 per cent stronger than on Tuesday.

It is the first time the Chinese central bank has raised the fixing rate since the Brexit vote, as the British pound and euro finally firmed up against the US dollar on Tuesday.

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

The British pound on Wednesday morning saw weakness again after rising 0.92 per cent on Tuesday, down 0.1 per cent or 21 pips to US$1.3319. The yen resumed its strengthening amid risk-off sentiment, up 0.26 per cent to stand at 120.47 per dollar.

Capital liquidity is gradually improving and appears to have weathered the initial Brexit sell off, but pound volatility still exists and foreign exchange markets will remain a hot spot, Stephen Innes, senior trader at Oanda Asia Pacific, wrote in a note.

The PBOC has so far elected to allow all of the US dollar repricing plus waning risk sentiment to influence its yuan fixing
Stephen Innes, Oanda Asia Pacific

The Chinese central bank has insisted the yuan should remain stable against a basket of currencies, despite depreciating to a five-and-half-year low as the pound and euro slumped after Britain’s vote to leave the EU.

In a statement issued on Sina Weibo on Tuesday, the People’s Bank of China said it will maintain the current mechanism that decides the currency’s exchange rate.

“The PBOC has so far elected to allow all of the US dollar repricing plus waning risk sentiment to influence its yuan fixing,” Innes wrote.

Further negative headwinds are coming from lower Chinese economic growth expectations in the wake of Brexit, he said.

The gap between the offshore yuan and onshore yuan has widened to 240 basis points from almost zero before the Brexit vote, as the offshore market was not bound to the 2 per cent limit and reflected greater downside pressure on the yuan.

A small rally in offshore yuan may be seen as temporary if risk-on sentiment prevails as some overextended long positions on the greenback clear out, Innes said.

“The US dollar has played a significant safe haven role, so all eyes will be on risk sentiment and a possible reversal of long US dollar safe haven hedges,” he said.