China’s yuan drops sharply following media report PBOC prepared to tolerate softer currency

Thursday’s session saw the yuan recapture lost ground after a PBOC statement saying that it has no plan to boost exports by depreciating its currency

PUBLISHED : Thursday, 30 June, 2016, 12:22pm
UPDATED : Thursday, 30 June, 2016, 10:53pm

The offshore yuan market was sent on a wild ride Thursday afternoon, before settling moderately lower, amid reports that China’s central bank is prepared to allow the currency to fall as low as 6.8 per dollar in 2016.

The offshore yuan in Hong Kong plunged to 6.70 per US dollar from around 6.66 within 20 minutes, but soon climbed back to trade at 6.6610 against the greenback as of 4.24pm, 0.11 per cent or 76 basis points weaker from a day earlier.

The onshore yuan in Shanghai also saw a quick drop but recovered to close at 6.6433 per dollar at 4.30pm, 31 pips or 0.05 per cent stronger from a day earlier.

The gap between onshore and offshore yuan has narrowed to 170 pips, from over 300 pips after the Brexit vote.

The sharp movement came after Reuters reported that the People’s Bank of China has the intention to allow the currency to soften to 6.8 per dollar in 2016, citing policy sources.

The PBOC wants a weaker yuan to help support the economy, the report said, citing a government economist which it did not identify.

“The central bank is willing to see yuan depreciation, as long as depreciation expectations are under control,” the report cited the economist as saying.

The PBOC said in a statement later that China has no plan to boost exports by depreciating the yuan, and that there has been no change in the current pricing mechanism.

Although the yuan has depreciated due to the impact of Brexit, it remains stable and there is no basis for a long-term devaluation of the currency, the statement said.

Many market watchers, including UBS, BNP Paribas and JP Morgan have forecast that the yuan will slide to 6.8 or 6.9 against the US dollar by the end of this year.

Since Britons voted to leave the European Union last week, the onshore yuan slumped nearly 1 per cent to breach 6.6 per dollar and now trade at its lowest level in five and a half years.

Since Tuesday, both global stocks and currencies markets have shown signs of stabilisation. Sterling traded at US$1.3478 as of 5.07pm, up 0.36 per cent or 49 pips from a day earlier. It has gained 1.4 per cent since Tuesday.

“Short-sellers are taking profits so we see the pound rise a little, but it could drop further as lots of issues after Brexit remained unsolved,” said Jasper Lo, chief executive of King International.

The yuan will face more pressure if the pound and euro start falling again, Lo said.

Lo expects the pound to drop to US$1.28 in the third quarter, amid uncertainty over the new UK prime minister and the possibility of a renewed independence movement from Scotland.

If Hillary Clinton wins the US presidential election in November, the greenback may strengthen which would drag down other currencies, Lo said.

“Traders are now focusing on the pound, but if more member countries seek to leave the EU, short sellers will turn to euro,” Lo said.