Yuan declines most in a month as PBOC allows greater flexibility

[BEIJING] The yuan skidded into losses in onshore trading, a day after gaining the most in a decade, amid speculation the central bank is allowing greater two-way movements in the currency.

The exchange ratedropped 0.28 per cent, the most since Jan 7, to 6.5122 a dollar as of 11.19am in Shanghai, according to China Foreign Exchange Trade System prices.

The currency surged 1.3 per cent on Monday as it caught up with declines in the greenback last week, when Chinese markets were shut for the Lunar New Year holidays. The People's Bank of China set its daily reference ratelittle changed at 6.5130.

"The yuan is being pressured as the fixing was on the weaker side of market expectations," said Eddie Cheung, a Hong Kong-based currency strategist at Standard Chartered Plc who had a forecast of 6.4900-6.5180. "Also, the yuan's advance in the past session was quite sharp. The central bank will keep the currency stable in the near term as it doesn't want to create volatility."

The nation's balance of payments position is good, capital outflows are normal and the exchange rate is basically stable against a basket of currencies, PBOC Governor Zhou Xiaochuan said in an interview published in Caixin magazine over the weekend.

Regulators should learn lessons from last year's volatility in the stock and currency markets and address issues including those related to internal management, Premier Li Keqiang said at a State Council meeting on Monday, according to a Beijing News report carried on the central government's website.

ECONOMY, RESERVES

The PBOC has to tread a fine line between trying to boost the slowest economic growth in 25 years and avoiding a yuan depreciation sharp enough to trigger capital outflows and a currency war.

Foreign-exchange reserves fell US$99.5 billion in January, the second-biggest drop on record, as the PBOC limited the yuan's decline. The monetary authority has cut interest rates six times since November 2014, and reduced bank reserve- requirement ratios.

China's broadest measure of new credit surged to a record in January as a seasonal lending binge coincided with a recovery in property prices, and as companies paid back foreign currency loans amid yuan weakness. Aggregate financing rose to 3.42 trillion yuan (S$737 billion), according to data released Tuesday, compared with the median forecast of 2.2 trillion yuan in a Bloomberg survey.

PBOC EASING

"The figures show that the Chinese government implicitly supports banks expanding their balance sheet as it seeks to bolster economic growth," said Zhou Hao, a senior economist at Commerzbank AG in Singapore. "This policy stance suggests the PBOC will likely cut lenders' reserve-requirement ratios as soon as this month and ease monetary policy in the future, which will pressure the yuan weaker."

The offshore yuan Yuan Declines Most in a Month as PBOC Allows Greater Flexibility traded in Hong Kong halted a five-day advance to decline 0.23 per cent to 6.5149 a dollar. The onshore currency's one-month implied volatility, a measure used to price options, dropped 82 basis points in two days to 7.41 per cent.

"The adjustment from the Lunar New Year is over," said Nathan Chow, a Hong Kong-based economist at DBS Group Holdings Ltd. "But with the Federal Reserve expected to slow the pace of any interest-rate increase, currencies will have room to appreciate against the dollar. Also, the yen's rise can spur strengthening of the yuan as well, because it has a pretty high weighting in the PBOC's new basket of currencies."

NEW INDEX

The CFETS RMB Index was unveiled in December, with the PBOC saying that the yuan's performance shouldn't be measured against the dollar alone. The basket is composed of 13 currencies, with weightings based mainly on international trade.

The dollar has the largest share with 26.4 per cent, followed by the euro and the yen with 21.4 per cent and 14.7 per cent, respectively.

"The yuan's catch-up appreciation was a one-off move and for now we should expect smaller movements, but in both directions," said Sean Callow, a foreign-exchange strategist in Sydney at Westpac Banking Corp.

BLOOMBERG