Yuan still stable, insists central bank, despite continuing to fall

PUBLISHED : Tuesday, 28 June, 2016, 11:10am
UPDATED : Tuesday, 28 June, 2016, 7:39pm

The People’s Bank of China has insisted the yuan remains stable against a basket of currencies, despite depreciating to a five-and-half-year low after Britain’s vote to leave the European Union.

In a statement issued on the Sina Weibo on Tuesday, the Chinese central bank said it will maintain the current mechanism that decides the currency’s exchange rate.

It said the market’s expectation for the yuan is still stable, while appreciating the strengthen of US dollar against the pound and euro had dragged the currency down recently.

Onshore yuan in Shanghai traded at 6.6487 per dollar at 4.30pm on Tuesday — its official closing price — down 94 basis points or 0.14 per cent from Monday’s official closing price of 6.6393 per dollar, and 6.6528 by 4.55pm.

In Hong Kong, offshore yuan was flat at 6.6805, only 1 basis point weaker than Monday’s closing.

The PBOC continued to set the yuan reference point lower at 6.6528 against the US dollar, the weakest level since December 2012, and down 153 basis points or 0.2 per cent from Monday’s fixing .

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

Both the onshore and offshore yuan have dropped over 1 per cent since Britons voted to leave the European Union on Friday last week, reaching a five and a half year low.

The falls came as the pound, a constituent of the basket of currencies that the yuan tracks, plunged more than 11 per cent to a 31-year low in the wake of surprising vote to leave the EU. The euro has also weakened 2.9 per cent to US$1.1059 since then.

The yen, which is being seen as a safe haven, at one stage strengthened over 4 per cent to 101.43 per dollar in two days.

On Tuesday, the pound and euro both firmed slightly with the yen sliding.

“Defending the yuan will likely be a more difficult and costly task for the central bank.
Kevin Lai, analyst at6 Daiwa Capital Markets

Sterling was trading at US$1.3299 by 5.20pm, up 74 points or 0.56 per cent to end its two-day losing streak. The euro also gained 0.31 per cent to stand at US$1.1056.

Analysts said the effects of the Brexit are unlikely to ease anytime soon.

Citibank economist Peng Cheng predicted sterling could fall to US$1.25, as many political issues connected to the exit vote remain unsolved.

“A new round of money outflows has started and is putting downward pressure on the yuan,” Kevin Lai, an analyst at Daiwa Capital Markets, wrote in a note. Lai’s been one of the most bearish analysts towards the yuan.

He said the PBOC’s fixing on Monday, which was down 0.9 per cent from a day earlier, implied that it has no intention of bringing the yuan back any stronger than 6.60 to the dollar.

“Defending the yuan will likely be a more difficult and costly task for the central bank.

“This could open a potential and relatively fast route to at least 7.00 per dollar in the next few months,” he said.

“We also expect China’s foreign reserves to fall to US$2.7 trillion by the end of 2016, as selling pressure picks up.”