Yuan swoons to near three-week low after Moody’s downgrades China debt outlook to ‘negative’

PBOC sets the daily yuan fixing at 6.5490 per US dollar, weaker by 105 basis points versus Tuesday’s setting

PUBLISHED : Wednesday, 02 March, 2016, 1:35pm
UPDATED : Wednesday, 02 March, 2016, 6:21pm

The yuan traded at a nearly three-week low on Wednesday after credit rating agency Moody’s downgraded its outlook on Chinese sovereign debt to “negative”.

The offshore yuan was quoted at 6.5555 in early trades on Wednesday morning before rebounding to 6.5546 at 6pm, or down 0.1 per cent from Tuesday. Wednesday’s level is fractionally higher than that of late Monday afternoon’s 6.5585 following the PBOC’s decision to increase yuan liquidity by lowering the amount of deposits banks must hold in reserve by half a percentage point.

Moody’s on Wednesday downgraded its outlook on Chinese government debt to “negative” from “stable” citing uncertainty over Beijing’s capacity to implement economic reforms, rising government debt and falling foreign exchange reserves.

The PBOC on Wednesday set the daily reference rate at 6.5490 per US dollar, weaker by 105 basis points from Tuesday fixing, and the weakest level of any daily currency setting since February 3.

Stephen Innes, senior FX trader at OANDA, said traders are expecting that China will need to unveil additional stimulus measures to shore up economic growth.

“The markets were expecting a move above 6.55,” he said.

“Signs of an equity rally kicked off in Asia yesterday, despite the disappointing China PMI data. However, there’s a growing conviction amongst traders that the PBOC is very likely to enact further stimulus so that this rally could have some longevity.”

The onshore yuan was also a tad weaker on Wednesday, trading at 6.5540 per US dollar before rebounding to 6.5509 at 6pm, weaker by 0.03 per cent from Tuesday.

Meanwhile, the Hong Kong dollar also traded weaker against the US dollar, slipping 0.04 per cent to 7.7751 at 6pm on Wednesday.

The PBOC set the yuan midprice against the euro at 7.1181 on Wednesday, stronger by 30 basis points. Against the pound the midprice was set at 9.1394, weaker by 235 basis points. The fixing per 100 yen was 5.7482. In currency dealings, traders are allowed to trade up to 2 per cent either side of the midprice.