Chinese yuan touches weakest level in a month as Yellen opens door to US interest rate rise

Chinese currency hits 6.6806 to the US dollar in early morning trade, the lowest in a month

PUBLISHED : Monday, 29 August, 2016, 11:06am
UPDATED : Monday, 29 August, 2016, 10:56pm

The Chinese yuan dropped to its weakest level in a month at one point on Monday, as investors grappled with the timing of a possible US interest rate increase.

Onshore yuan in Shanghai closed at 6.6790 to the US dollar at 4.30pm, 0.15 per cent or 102 points weaker than on Friday, extending its losing streak for four days in a row. At one point it traded at a monthly low of 6.6806.

Offshore yuan in Hong Kong traded at 6.6888 to the US dollar at 5pm, 0.07 per cent, or 45 points stronger than on Friday.

The People’s Bank of China on Monday set the yuan reference point against the greenback at 6.6856, 368 basis points or 0.55 per cent weaker than on Friday, and the lowest level in a month.

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

In a much-anticipated speech given to an international gathering of central bankers in Jackson Hole, Wyoming, on Friday night, US Federal Reserve chairman Janet Yellen did not indicate when the Fed might raise rates. But her comments reinforced the view that a rise could come later this year. The Fed has policy meetings scheduled in September, November and December.

I suspect this is a bit overblown and after the initial negative fallout, the money markets will quickly normalise
Stephen Innes, Oanda senior trader

“After a week of guessing, Yellen left little to the imagination when she stated that the case of a Fed rate hike had strengthened, but that remains very much data dependent,” said Stephen Innes, senior trader at Oanda. “Given the proximity of the granddaddy of all Fed data, the non-farm payroll, it is without question that this week’s print will take on more importance than usual.”

Innes said another primary concern is the fear of a liquidity squeeze after the central bank resumes its 14-day reverse repo operations.

“I suspect this is a bit overblown and after the initial negative fallout, the money markets will quickly normalise,” he added.

“China’s latest PMI data will be closely watched, following a weak start to the third quarter. Last month’s data indicated that factories continue to struggle as global demand stumbles,” said Innes.

China will release its official August manufacturing PMI data on Thursday. Analysts expect the gauge to stand at July’s level of 49.9, which indicates continuing contraction, according to a poll by Reuters.

In other currency trading, the yen weakened 0.35 per cent to 102.18 against the greenback thanks to a US dollar rally.

Additional reporting by Jennifer Li