Yuan extends slide against dollar as PBOC sets the daily reference rate weaker

PUBLISHED : Monday, 05 December, 2016, 11:44am
UPDATED : Monday, 05 December, 2016, 11:44am

The Chinese yuan continued its weaking trend on the first day of the Shenzhen-Hong Kong Stock Connect, even as the Chinese authority tightened controls over capital outflow.

The offshore yuan in Hong Kong extended its recent string of losses, falling 0.2 per cent to 6.8888 per US dollar as of 9.54 am in Asian trading hour. However, the onshore yuan in Shanghai managed to stay barely changed at 6.8894 per US dollar.

The continued weakness of the yuan comes after the People’s Bank of China cut the yuan’s daily reference rate by 76 basis points to 6.8870 per US dollar, compared to 6.8794 against the US dollar last Friday.

The yuan has undergone depreciation since the US elections on November 8, which prompted PBOC official to publically support the currency recently. Other support for the yuan came in the form of Chinese state-owned banks, which sold US dollars in the foreign exchange market to help shore up the yuan, while Chinese authorities unveiled new measures to tighten controls on capital outflows.

While the outlook for continued yuan depreciation remains, dealers are in little mood to challenge the dollar-selling activities of state-owned banks, nor the exorbitant short-term yuan funding rates, as the markets concede to a likely 6.90 yuan per US dollar top end heading into year end, said Stephen Innes.

The overnight Hong Kong Interbank Offered Rate rose to 12.3813 on Monday, the highest since September 19, which is discouraging short yuan trades.

“The Trump reflationary trade is expected to reassert itself in early 2017, which will leave the PBOC struggling to support the yuan in the face of broader US strength,” said Stephen Innes, senior trader at OANDA on Monday.

“I think February next year will be a critical time to see for the yuan, as Donald Trump will walk into the office by then and Chinese spring festival will also come around that time when typically the PBOC will ease liquidity to meet increasing demand,” said Jeremy Cook, the chief Economist and Head of Currency Strategy at World First,

He added that renewed pressure on the yuan could pick up in January when its likely that Chinese citizens will rush to use up their annual US$50,000 quota on foreign exchange.