Yuan falls to near 3-week low as depreciation pressure returns

PUBLISHED : Tuesday, 20 June, 2017, 2:36pm
UPDATED : Tuesday, 20 June, 2017, 2:36pm

China’s offshore and onshore yuan dropped to their weakest levels in almost three weeks on Tuesday after the central bank set the daily yuan reference rate lower following a rebound in the dollar overnight.

The fact that the offshore yuan is trading well below its onshore counterpart as well as below the central bank’s yuan daily mid-point fixing suggests that depreciation pressure is gradually returning to the currency market after the US Fed’s decision to raise interest rates last week, said Jimmy Zhu, chief strategist at Fullerton Markets.

The dollar index, a gauge of the greenback’s performance against a basket of other currencies, was also bolstered by influential New York Fed president William Dudley’s hawkish comments on the case for monetary policy normalisation, dismissing the recent slowdown in inflation in the US.

“Worries are persisting about a pick-up in dollar demand in the second half even though Chinese officials have been trying to anchor expectations,” Zhu said.

Worries are persisting about a pick-up in dollar demand in the second half even though Chinese officials have been trying to anchor expectations
Jimmy Zhu, Fullerton Markets

The People’s Bank of China guides market trading in the yuan and domestic traders are only allowed to buy or sell the currency within 2 per cent of its daily yuan reference rate. On Tuesday, the central bank set the daily mid-point fixing 0.2 per cent weaker at 6.8096 per dollar.

Both onshore and offshore yuan are near their weakest level since May 31, with onshore yuan falling to as low as 6.8303 per dollar and the offshore yuan dropping to as low as 6.8355.

In late May, the central bank tweaked its formula for calculating daily yuan reference rates and was said to have also engineered a spike in yuan appreciation to ward off speculative outflow pressure.

The measures have successfully curbed one-way speculation over the yuan’s depreciation, but the market has doubts about the yuan’s strength, Gao Qi, currency strategist at Scotiabank, said in a research note.

If the wide gap between the currency and the daily fixing continues and depreciation pressure returns to the market, the central bank may intervene with similar action seen in late May, Gao said.

Recent official data in May shows net foreign exchange demand of US$4 billion. Foreign exchange outflow routed through the offshore yuan market was US$17.1 billion, which resulted in total outflows from China of US$21 billion, indicating a pick up in outflows of US$13 billion in April, according to Goldman Sachs.

While May outflows were much better than last year, the continued net foreign exchange outflow may have been one reason for the recent shift in the authorities’ management of the currency, Goldman said.