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Yuan

Yuan fixing tumbles to 3-week low amid capital flight worries

China’s January foreign reserves unexpectedly fall below US$3 trillion for first time in six years

PUBLISHED : Wednesday, 08 February, 2017, 12:00pm
UPDATED : Thursday, 09 February, 2017, 10:12am

The Chinese yuan weakened on Wednesday in the offshore market following the lowest fixing in more than three weeks by the People’s Bank of China (PBOC), after the country’s January foreign reserves unexpectedly fell below US$3 trillion for first time in six years, triggering concerns about sustained capital flight.

The offshore yuan softened for a second day, down 0.02 per cent or 16 basis points to 6.8368 in the morning trade. However, the currency strengthened in the onshore market, up 0.02 per cent or 14 basis points to 6.8839.

Earlier in the day, the PBOC set the yuan’s mid-point rate sharply lower at 6.8849 per US dollar, down 245 basis points from the previous reference rate. China allows the yuan to trade within 2 per cent of the daily mid-point rate.

The central bank also halted its open market operation for a fourth straight day, in a sign of continued tightening policy bias.

Despite their (Chinese authorities’) heavy-handed interventions, the reserve data clearly signals greater than anticipated capital flight and highlights the ineffectiveness of current policies
Stephen Innes, senior trader at Oanda Asia Pacific

The weaker fixing by PBOC came after data showed China’s January foreign reserves dropped to US$2.9982 trillion, the first time in six years below the US$3 trillion level.

“Despite their (Chinese authorities’) heavy-handed interventions, the reserve data clearly signals greater than anticipated capital flight and highlights the ineffectiveness of current policies,” said Stephen Innes, a senior trader at Oanda Asia Pacific.

Tim Condon, chief economist for ING Asia, forecast capital flight will continue amid expectations of firther yuan depreciation.

“We expect reserve adequacy to become more urgent if US dollar buying doesn’t slow significantly. Capital controls could be tightened but that wouldn’t damp sentiment,” he said.

Condon also said it’s likely the Chinese authorities may react with a higher yuan fixing to counter the trend.

“We are reviewing our year-end 6.80 US dollar/yuan forecast for downward revision,” he added.

Among other currencies, the US dollar dropped against the Japanese yen on Wednesday morning, down 0.2 per cent to ¥112.17 from ¥112.39 late Tuesday. It also declined 0.03 per cent to 1.0686 per euro.

However, the greenback rose slightly against the pound, up 0.02 per cent to $1.2506.

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