Yuan in Biggest Weekly Drop Since Devaluation as PBOC Eases Grip 

• Central bank may enter market again after Fed decision: OCBC
• Yuan weakness trend is inevitable, according to Commerzbank

The yuan recorded its biggest weekly drop since an August devaluation on speculation China’s central bank is taking advantage of a stronger dollar to weaken the currency before the U.S. raises interest rates.

The yuan fell 0.27 percent to close at 6.4553 versus the greenback in Shanghai, taking its five-day loss to 0.83 percent, China Foreign Exchange Trade System prices show. The dollar has advanced against 10 of the world’s 16 major exchange rates since Dec. 4, with odds slanted toward the Federal Reserve Open Market Committee tightening monetary policy next week.

The People’s Bank of China cut the yuan’s daily reference rate by 0.8 percent this week, the most since it devalued the currency in August and made the fixing mechanism more market-oriented. The central bank has periodically been seen propping up the yuan in Shanghai and Hong Kong by selling dollars. There isn’t any basis for long-term depreciation, Wang Yungui, a director at the State Administration of Foreign Exchange, said at a regular briefing in Beijing on Thursday.

“We haven’t seen any decisive intervention this week and investors take that as the PBOC allowing a weaker currency,” said Tommy Xie, a Singapore-based economist at Oversea-Chinese Banking Corp. “That said, they may come back in after next week’s FOMC meeting as there’ll be a better picture on the U.S. interest-rate outlook.”

The PBOC has lowered its daily yuan fixing on seven of nine trading days since winning reserve-currency status at the International Monetary Fund on Nov. 30. The onshore spot rate is allowed to trade a maximum 2 percent on either side of the reference rate.

China’s foreign-exchange reserves fell $87 billion in November, more than the $33 billion forecast and a sign the central bank was supporting the yuan. The stockpile slumped by a record $94 billion in August.

In Hong Kong’s offshore market, the yuan declined 0.13 percent to 6.5357 a dollar, extending this week’s drop to 1.4 percent, according to data compiled by Bloomberg. The offshore currency’s spread to the onshore rate widened to an average 809 pips this week, from 447 pips in the previous five days.

“There is no doubt that China’s central bank stepped into the market to narrow the onshore-offshore spread, which signals that Chinese authorities deem that yesterday’s market movement was out of control,” Zhou Hao, a Singapore-based economist at Commerzbank AG, wrote in a research note Friday. “While the central bank will continue to sell dollars when market enters panic mode, the trend of yuan weakness is inevitable.”

The PBOC on Friday released guidelines on free trade zones in the provinces of Guangdong and Fujian as well as Tianjin city, granting companies registered in the area up to $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.

Source: Bloomberg – Yuan in Biggest Weekly Drop Since Devaluation as PBOC Eases Grip

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