Yuan Falls Sharply Against U.S. Dollar
June 27 2016 - 12:00AM
Dow Jones News
The Chinese yuan fell to its weakest level against the U.S.
dollar since late 2010, after China's central weakened its
benchmark rate by the biggest margin since a one-off devaluation in
August 2015.
The yuan was fixed at 6.6375 to the U.S. dollar from Friday's
midpoint of 6.5776, the weakest level for the domestic currency
since Dec. 24, 2010. The People's Bank of China slashed the yuan's
parity rate by 0.9%, compared with last summer's 1.1%
devaluation.
In the onshore market, the yuan now trades at 6.6408, its
weakest level against the U.S. dollar since Dec. 24, 2010. In the
offshore market in Hong Kong, the yuan traded at 6.6587, its
cheapest level against the dollar since Jan. 11.
The sharp move in the daily yuan fixing reflects volatility in
currency markets following the U.K.'s decision to leave the
European Union. The onshore yuan traded 0.4% weaker compared with
its Friday closing value, which was less significant than Monday's
fix because the currency had been able to reprice. The Chinese
currency is allowed to move by up to 2% on either side of the daily
fix.
The prime reason for the sharply higher onshore fix was the 2.5%
rally in the U.S. dollar index on Friday, as haven currencies
surged following the "Brexit" referendum.
The British pound plunged 8.1% against the U.S. dollar on
Friday, but its effect on the yuan is relatively limited as it
makes up just 3.86% of the basket of currencies used by the China
Foreign Exchange Trade System to track the yuan's trade-weighted
value. By contrast, the U.S. dollar accounts for more than a
quarter of the weighting.
Pressure on the British pound intensified in Asia morning
trading on Monday. The U.K. currency fell 2.2% to 1.3386 against
the U.S. dollar. The euro also weakened 1.2% to 1.0990 against the
dollar.
Investors had expected that China's central bank would move to
calm markets after the Brexit vote by keeping the yuan stable,
wrote Zhou Hao, senior economist for emerging markets in Asia at
Commerzbank AG.
"The market should be a little bit disappointed as most of the
traders hoped that China's central bank should offer some sort of
'stability' amid rising market uncertainties," he said.
"Undoubtedly, today's [yuan] fixing rates hint that the market
should be prepared for more volatility."
The yuan's fall may be cushioned by the central bank again to
avert panic selling. On Friday, traders said the PBOC moved to
shore up the yuan's value via an intervention in the onshore
market, after the currency fell to its lowest level in nearly 5½
years due to concerns about the U.K. referendum.
On Monday, traders said the PBOC was at it again with the aim of
preventing the yuan from falling too sharply, after it earlier
dropped below 6.6400 against the dollar.
"But the intervention appeared to be not as forceful as it used
to be, which is a hint that the central bank is probably happy to
see the yuan depreciate further, as long as the pace is
controllable, to help boost the economy," a Shanghai-based senior
trader at a domestic bank said.
"The sharply lower yuan fixing this morning also shows that the
PBOC is trying to let the air out of the balloon a bit by bit,
instead of seeing the bubble burst at one go," the trader
added.
Given the central bank's more relaxed response thus far, selling
pressure on the yuan doesn't seem to be as heavy as was previously
feared. "Many of our clients are actually waiting on the sidelines,
trying to figure out how the entire world is still responding to
the Brexit outcome," the trader said.
The onshore-traded yuan has tumbled well past the 6.6000
psychological level, which could be a factor in changing the
market's view on the currency.
Something to watch for is the gap between the 1-month
dollar-yuan nondeliverable forward contract and the 12-month
contract. When it starts to widen, it implies investors are
starting to become more bearish on the yuan.
Write to Ewen Chew at ewen.chew@wsj.com, Gregor Stuart Hunter at
gregor.hunter@wsj.com and Shen Hong at hong.shen@wsj.com
(END) Dow Jones Newswires
June 26, 2016 23:45 ET (03:45 GMT)
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