Yuan falls to 15-month low ver­sus bas­ket as fix­ing lags dol­lar

The Pak Banker - - MARKETS/SPORTS -

The yuan fell to a 15-month low ver­sus a bas­ket of cur­ren­cies as a smaller-than-es­ti­mated in­crease in the cen­tral bank's fix­ing spurred spec­u­la­tion that China is try­ing to limit gains against the dol­lar.

The mon­e­tary au­thor­ity raised its daily ref­er­ence rate by 0.32 per­cent, com­pared with a 1.1 per­cent drop in a gauge of the green­back's strength. The dif­fer­ence prompted econ­o­mists to ques­tion the im­por­tance of mar­ket forces in the fix­ing, with Oversea-Chi­nese Bank­ing Corp. say­ing it ap­pears that the rate con­tin­ues to be a tool to guide in­vestor ex­pec­ta­tions.

A Bloomberg replica of the CFETS RMB In­dex, which China uses to mea­sure the yuan's per­for­mance against 13 cur­ren­cies, fell to 98.3, the low­est since De­cem­ber 2014. The on­shore yuan rose 0.59 per­cent, the most in a month, to 6.4856 a dol­lar as of 5:47 p.m. in Shang­hai, af­ter the Peo­ple's Bank of China boosted its fix­ing to 6.4961. The off­shore ex­change rate in Hong Kong was lit­tle changed at 6.4851, ac­cord­ing to data.

"The fix­ing was lower than ex­pected, con­sid­er­ing the dol­lar's weak­ness overnight and sug­gests that the ref­er­ence rate is still not fully mar­ket-based," said Tommy Xie, an econ­o­mist at OCBC in Sin­ga­pore. "I ex­pect the PBOC to of­fer some form of sup­port, such as rais­ing the fix­ing to a stronger level, when the in­dex drops below 98. That's a level that could send a sig­nal that China's econ­omy has been slow­ing and the yuan has been drop­ping too quickly." Ex­ports slumped 25 per­cent in Fe­bru­ary from a year ear­lier and the trade sur­plus al­most halved from Jan­uary's level, mak­ing a case against yuan gains. This com­pli­cates Premier Li Ke­qiang's man­age­ment of the world's se­cond-largest econ­omy, forc­ing him to walk a thin line be­tween cur­rency de­pre­ci­a­tion to boost growth, and try­ing to avoid spurring fur­ther cap­i­tal out­flows.

The cen­tral bank has drafted rules for a tax on for­eign-ex­change trans­ac­tions that would help curb cur­rency spec­u­la­tion, ac­cord­ing to peo­ple with knowl­edge of the mat­ter. The ini­tial rate of the so-called Tobin tax may be kept at zero to al­low au­thor­i­ties time to re­fine the rules, said the peo­ple, who asked not to be iden­ti­fied as the dis­cus­sions are pri­vate.

The Chi­nese cur­rency has re­turned to a more "nor­mal, ra­tio­nal and fun­da­men­tals­driven" trend, and the na­tion doesn't need to use the for­eign-ex­change pol­icy to boost trade, PBOC Gov­er­nor Zhou Xiaochuan told re­porters on Satur­day. His deputy, Yi Gang, said in Fe­bru­ary that the ex­change rate will be de­ter­mined mainly by a bas­ket of cur­ren­cies. The cen­tral bank, soon af­ter it shocked global mar­kets by de­valu­ing the yuan in Au­gust, said it was mov­ing to a more-based sys­tem for set­ting the daily fix­ing.

"The on­shore yuan strength­ened be­cause the fix­ing was stronger and the mar­ket is sell­ing the dol­lar heav­ily," said Ken Che­ung, a cur­rency strate­gist at Mizuho Bank Ltd. in Hong Kong. "The Fed's com­ments yes­ter­day were much more dovish than ex­pected. the mar­ket thinks that the mon­e­tary eas­ing for ma­jor cen­tral banks has al­ready en­tered a turn­ing point that pol­icy di­ver­gence may not widen fur­ther too much."

The dol­lar weak­ened on Wed­nes­day af­ter Fed­eral Re­serve of­fi­cials scaled back in­ter­est-rate ex­pec­ta­tions. They cited the po­ten­tial im­pact from weaker global growth and fi­nan­cial-mar­ket tur­moil on the U.S. econ­omy for keep­ing the tar­get range for the bench­mark fed­eral funds rate 0.25 per­cent and 0.5 per­cent.

"The fix­ing is not re­flect­ing all the dol­lar weak­ness overnight," said Tommy Ong, man­ag­ing di­rec­tor for trea­sury and mar­kets at DBS Hong Kong Ltd. "This shows that the PBOC doesn't want the cur­rency to strengthen too much."

In the money mar­kets, the seven-day re­pur­chase rate, a gauge of in­ter­bank fund­ing avail­abil­ity, rose one ba­sis point to 2.30 per­cent, ac­cord­ing to a weighted av­er­age from the Na­tional In­ter­bank Fund­ing Cen­ter. The cost of one-year in­ter­est-rate swaps, the fixed pay­ment to re­ceive the float­ing sev­en­day repo rate, climbed two ba­sis points to 2.28 per­cent, data com­piled by Bloomberg show. The yield on govern­ment notes due Jan­uary 2026 ad­vanced two ba­sis points to 2.83 per­cent, prices from the Na­tional In­ter­bank Fund­ing Cen­ter show.

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