Yuan weakens sharply after PBOC sets fixing at two-week low; all eyes on Fed

The Chinese yuan weakened sharply Tuesday in both onshore and offshore markets, retreating after recent advances, as investors looked to the US Federal Reserve for clues to its balance sheet reduction plan as its two-day monthly meeting gets underway later today.

The Fed is widely anticipated to hold interest rates steady while announcing details of its US$4.5 trillion balance sheet wind down at the conclusion of its September meeting on Wednesday.

On Tuesday, the onshore Chinese yuan fell as much as 0.3 per cent to a daily low of 6.5977 per US dollar. By 4.30pm, it was still down 0.2 per cent, or 116 basis points, at 6.5868 from 6.5752 late Monday.

The offshore yuan also briefly declined 0.3 per cent to 6.596 per US dollar in the morning. It fell 0.2 per cent, or 112 basis points, to 6.5863 by 4.30pm.

Earlier in the day, the People’s Bank of China set the yuan’s mid-point rate at 6.553 per US dollar, the lowest level in more than two weeks. The fix was down 111 basis points from the previous day’s 6.5419.

“With fading bullish yuan sentiment, the [offshore yuan] and [onshore yuan] were more vulnerable to the US dollar rebound,” said Ken Cheung, senior Asian forex strategist for Mizuho Bank.

The Fed meeting will be a key focus of the market and drive yuan movement, Cheung said.

“As the Fed’s rate hike at the meeting is off the table, a post-FOMC (Federal Open Market Committee) rate hike by the PBOC is highly unlikely. More importantly, the PBOC is not likely to deliver any abrupt rate hike to disrupt the financial market stability ahead of 19th Party Congress, or to reignite the bullish RMB sentiment at this moment,” he said.

Any re-pricing of Fed’s balance sheet reduction could lift US treasury yields and put the yuan under pressure, Cheung said.

The Chinese yuan has retreated against the greenback in the past few days following a 2 per cent advance last month.