Onshore yuan loses ground after PBOC cuts fix by most in six weeks

The onshore Chinese yuan lost ground against the US dollar on Monday, after the People’s Bank of China cut the daily fix by the most in six weeks.

On the same day, China’s official foreign exchange trading platform operator adjusted the fixing mechanism of the yuan’s mid-point against the US dollar in order to help curb speculation, a Reuters report said.

Yuan in the spot market traded at 6.8779 per US dollar as of 5pm, weaker by 0.2 per cent or 114 basis points from 6.8665 late Friday.

The offshore yuan also erased morning gains and moved lower against the greenback, down 0.1 per cent or 63 basis points to 6.8571. The offshore rate looks set to fall for a third straight session.

Earlier in the day, the PBOC lowered the yuan’s mid-point rate to 6.8743 per US dollar, down 0.4 per cent or 287 basis points from the previous fixing. It was the biggest cut by the central bank since January 9.

Before Monday, the yuan’s reference rate had risen for four sessions in a row, the longest stretch of increases in six months.

In a bid to “help curb intraday speculative trading activities”, China Foreign Exchange Trade System cut the reference period of yuan trading against its trade-weighted basket to 15 hours from the previous 24 hours, with the new period spanning from 4.30pm in the previous session to 7.30am, a Reuters report cited anonymous banking sources as saying on Monday.

Previously, the PBOC set the yuan’s daily mid-point rate against the US dollar based on both the previous day’s 4.30pm closing price and changes in the yuan’s daily trading in the past 24 hours against its trade-weighted basket.

Domestic traders are only allowed to buy or sell the yuan within 2 per cent of the daily reference rate.

Analysts said the Chinese authorities will continue to maintain tight capital controls and support the yuan, as the depreciation pressure is likely to continue into the year.

China’s monthly non-FDI (foreign direct investment) capital outflows eased to US$58 billion in January from December’s US$64 billion, the second consecutive month of decline, according to an estimate by Standard Chartered Bank.

“The latest data points to the effectiveness of recent administrative measures to slow outflows – stricter rules on banks’ reporting of cross-border customer transactions and increased disclosures for individual FX conversion,” said Standard Chartered analysts Kelvin Lau and Shuang Ding in a report on Monday.

“[However] we think the authorities will be under pressure to keep swimming against the tide, as depreciation expectations are unlikely to reverse anytime soon,” they added.

Ken Cheung, Asian forex strategist for Mizuho Bank, also expected the policy makers to keep defending the yuan.

“After the confirmation of Steven Mnuchin as the Secretary of US Treasury, the PBOC will probably attempt to support the RMB, to avoid giving the Trump administration an excuse to label China a currency manipulator,” said Cheung.

“All of these pointed to stabilising RMB sentiment, but any comments from US President Trump on RMB valuation and China could unnerve investors again,” he added.

In other forex markets, the US dollar firmed against the Japanese yen, up 0.3 per cent or 29 basis points to ¥113.13.

Against the euro, the US dollar swung between gains and losses during the day. As of 4.30pm, the euro rose 0.07 per cent or 7 basis points to US$1.0623.

The greenback also retreated against the British pound, as sterling advanced 0.2 or 23 basis points to US$1.2435.