Yuan tumbles, testing 7 per US dollar level after hawkish Fed statement

PUBLISHED : Thursday, 15 December, 2016, 10:50am
UPDATED : Thursday, 15 December, 2016, 10:43pm

Chinese yuan tumbled in the onshore market on Thursday after the US Federal Reserve raised the interest rate overnight and made a more hawkish statement than expected by foreshadowing more interest rates hikes in 2017.

Onshore yuan traded in Shanghai opened nearly 300 basis points, or 0.43 per cent, lower at 6.9350 per US dollar and hit an intraday low of 6.9366 against the greenback at one point, a fresh new low in over eight years. It was quoted at 6.9335 per US dollar in evening trading on Thursday, 0.41 per cent lower than the previous day’s closing price.

Offshore yuan traded in Hong Kong hit an intraday low of 6.9505 against the US dollar before rebounding to 6.9320 in the evening session, 0.04 per cent stronger than the previous closing price.

The People’s Bank of China slashed the yuan’s reference rate by 261 basis points to 6.9289 per US dollar on Thursday, refreshing the weakest point since June 2008. Traders are allowed to trade 2 per cent either side of the reference rate.

There is a chance that the yuan breaks the level of 7 against the US dollar in the first half of next year
Zhang Jingqin, FX strategist, Standard Chartered

The yuan weakness comes as the US dollar index, a gauge of the strength of the greenback, surged over 1 per cent after the Fed’s statement, breaking the critical psychological level of 102.

The Federal Reserve increased its key interest rate by 0.25 per cent overnight, the first rate hike in a year and the second one in a decade. Meanwhile, Fed officials raised their target for short-term interest rates by 0.25 percentage points to a range of 0.50 per cent and 0.75 per cent.

While the rate increase was within market expectations, the Fed also gave guidance for three rate rises in 2017, up from the two increases that had been widely anticipated.

The yield on benchmark 10-year Treasury notes rose to 2.5836 per cent, compared with 2.446 per cent just before the Fed’s rate statement.

China’s bond market was hit hard, with 10-year and 5-year Treasury bond futures posting their biggest drop on record. The benchmark 10-year government bond yield jumped to 3.39 per cent, compared to the intraday high of 3.2 per cent the previous day.

“Let’s not confuse this Fed lean with a modest shift in language, this is flat out hawkish, and the US dollar is reacting accordingly,” said Stephen Innes, senior trader at Oanda.

“With the dollar on solid footing across G-10, we should expect the current yuan depreciation trend to pick up some steam. In 2017, the risk of further capital control measures is high, in the face of the strengthening US dollar.”

Zhang Jingqin, FX strategist at Standard Chartered, said: “There is a chance that the yuan breaks the level of 7 against the US dollar in the first half of next year.”

Lin Junhong, director of research at Shanghai Commercial Bank, believes the yuan could weaken to 7.1 in the first quarter of 2017.

“Depreciation may intensify in the first quarter next year, as Chinese citizens will be granted US$50,000 foreign exchange purchase quotas for the new year from 1st January 2017,” Lin said.

However, Haitong Securities is more optimistic about the yuan in the short term, saying in a research not: “After the long-awaited interest rate hike finally becomes a reality, there is increasing chance the US dollar will fall back, reducing depreciation pressure on yuan in the short term.”