The yuan fell to a four-year low after the central bank said the currency should not be measured by its moves against the US dollar alone, a statement that is being interpreted as a sign it is to allow further declines.
Exchange rates are a reflection of trade and investment with multiple countries and the market has to take into account the yuan’s fluctuations against a basket of currencies, the People’s Bank of China (PBOC) said on Friday.
The China Foreign Exchange Trade System (CFETS), which is run by the PBOC to facilitate interbank trading, published a new yuan index composed of 13 currencies, with the US dollar accounting for 26.4 percent.
The yuan dropped 0.05 percent to 6.4585 per US dollar at 1:37pm in Shanghai trading, according to CFETS prices. The currency earlier declined to 6.4665 per US dollar, its weakest level since July 2011. While the currency has retreated 3.9 percent against the greenback this year, it has advanced against 12 of 16 major currencies tracked by Bloomberg. The PBOC yesterday cut its reference rate for the yuan by 0.21 percent to a four-year low of 6.4495 per US dollar.
“The latest move suggests the PBOC will allow weaker yuan fixings,” DBS Bank Hong Kong Ltd managing director for treasury and markets Tommy Ong (王良亨) said. “The yuan is also under pressure as the US is likely to hike rates this week.”
The central bank has lowered the reference rate, which limits the onshore currency’s moves to 2 percent on either side, on eight of the 10 trading days since winning reserve-currency status at the IMF on Nov. 30. This fueled speculation that the authority is trying to release pent-up depreciation pressure before the US Federal Reserve meets on Tuesday and Wednesday.
In Hong Kong’s offshore market, the yuan dropped 0.28 percent to 6.5504 per US dollar, extending a six-day decline to 1.6 percent, according to data compiled by Bloomberg.
That took its spread on the onshore spot rate to 919 pips, above an average of 511 pips in the past month. The PBOC has been seen propping up the yuan’s exchange rate in Hong Kong periodically to narrow the difference.
The one-month implied volatility on the onshore yuan, a gauge of expected price swings, surged 71 basis points yesterday to 6.75 percent, the highest since August, according to data compiled by Bloomberg.
“With the wider spread between onshore and offshore yuan, the intervention risk in the offshore market is now higher and will be more likely to happen after the Fed meeting this week,” Ong said.
The PBOC on Friday also released guidelines on free-trade zones Guangdong and Fujian provinces as well as in Tianjin, granting companies registered in the area up to US$10 million in capital account convertibility quotas.
In the Guangdong zone, individuals can borrow yuan funds from Hong Kong and Macau for property purchases within the area, the central bank said.
The introduction of a multi-currency index helps guide the public view of the yuan’s exchange rate, which would contribute to keeping the currency “basically stable at an adaptive and equilibrium level,” the PBOC said on Friday.
That reinforces other recent statements suggesting an increased focus on broader moves rather than just against the US dollar, according to a Goldman Sachs Group Inc note.
It forecast that the yuan would weaken to 6.6 per US dollar in one year.
Referencing the yuan to a basket of currencies does not mean the exchange rate is pegged to that, according to an article published yesterday on the PBOC Web site written by an unidentified CFETS commentator.
China’s ample foreign-exchange reserves and trade surplus should keep the yuan stable at a reasonable level, it said.
“This underscores how China’s authorities are increasingly looking at the currency in a much broader context, moving away from a focus on the [US] dollar, and so too should market participants,” HSBC Holdings PLC analysts including Paul Mackel wrote in a note on Saturday. “But this does not mean China is going to formally target a currency basket like Singapore does. We see the yuan at 6.50 by end-15 and 6.70 end-16, amid greater two-way volatility.”
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