Offshore yuan hits six year low as US dollars strengthens

PUBLISHED : Friday, 21 October, 2016, 2:14pm
UPDATED : Friday, 21 October, 2016, 10:43pm

Propelled by the strong US dollar, offshore yuan hit its lowest point on record on Friday, breaking two critical levels of 6.75 and 6.77 against the dollar within one day, while yields on China’s benchmark 10-year government bonds also hit their lowest in more than a decade on increased concerns over economic momentum in the world second largest economy.

Offshore yuan extended its weakness by 0.4 per cent to trade at 6.7757 against the dollar as of 6.30pm in Hong Kong on Friday, its weakest level since it began trading in 2010, after it broke through the critical 6.75 mark in morning trading.

Onshore yuan was down by 0.37 per cent, trading at 6.7648, also a six year low and extending its third straight week of losses.

The People’s Bank of China (PBOC) cut the yuan’s daily reference rate against the US dollar by 0.37 per cent or 247 basis points to 6.7558, the biggest cut since August 29 this year. It is the first time since October 2010 that the yuan’s reference rate has dipped below 6.75.The PBOC allows the yuan to trade 2 per cent either side of the reference rate.

The yield on 10-year government bonds hit 2.635 per cent in afternoon trading in Shanghai, the lowest since at least 2006, according to data from Bloomberg.

The yuan’s slump comes after a strengthening of the US dollar following the European Central Bank’s decision to leave its ultra-loose monetary policy unchanged on Thursday. Meanwhile, ECB president Mario Draghi kept a wide range of options open for further stimulus in December, shooting down any talk of tapering its 1.7 trillion asset-buying programme.

The US dollar was also supported by a stronger-than-expected USexisting home sales report released on Thursday.

The US dollar index, the key measure for the strength of the greenback against a basket of major currencies, climbed 0.21 per cent to 98.53 in the evening session on Friday, a seven month high. That came after a 0.47 per cent gain the previous day.

The PBOC won’t fight dollar strength, and it won’t draw a line, at least in the next few weeks
Andy Ji, currency strategist at Commonwealth Bank

“The continued dollar strength has weighed on the yuan,” said Andy Ji, a currency strategist at Commonwealth Bank of Australia in Singapore. “The PBOC won’t fight dollar strength, and it won’t draw a line, at least in the next few weeks.”

Stephen Innes, a senior trader at Oanda, said, “I suspect traders will likely test the waters to check the state-owned bank’s resolve.”

Depreciation pressures will continue to build into the year’s end, with short-term pressure mounting as corporate demand for dollars grows in order to repay debt or expand overseas operations, added Innes.

Separately, negative news about increased capital outflows intensified expectation for the yuan’s further depreciation.

Chinese banks saw a deficit of 179.3 billion yuan in foreign exchange sales and purchases for clients in September, surging more than seven times from the 21.7 billion yuan in the previous month, according to the latest data from the State Administration of Foreign Exchange. That’s the highest level since March this year. Meanwhile, the deficit of foreign related receipts and payments rose to the highest level since records began in 2010.

Starting from October, the yuan has seen a steady decline on expectations that Chinese economic fundamentals will remain weak for a prolonged period.

Although the Chinese economy is showing some signs of stabilisation with inflationary prospects pointing upwards, investors are still concerned about the country’s growth prospects, said Ming Ming, chief fixed-income analyst at Citic Securities in Beijing.

China’s industrial production unexpectedly fell to 6.1 per cent in September from 6.3 per cent in the previous month, showed official data released on Wednesday, missing expectations of 6.4 per cent, while the country’s GDP grew 6.7 per cent in the third quarter compared to the same period last year.