Yuan set for biggest weekly drop since January as pressures rise

[SHANGHAI] China's yuan headed for the biggest weekly decline since January as mainland markets returned from holidays to face intensified depreciation pressures from a rising US dollar.

The exchange rate in Shanghai retreated 0.7 per cent this week, catching up with a drop in the offshore yuan while China was shut. The renewed weakness, especially beyond the 6.7 per US dollar level previously seen as the central bank's tolerance limit, came amid bearish comments from Royal Bank of Canada and predictions of a 17 per cent tumble from Deutsche Bank AG.

The increased stress on the exchange rate is coming from the greenback, which has climbed for two straight weeks amid rising odds of a Federal Reserve interest-rate increase, as well as disappointing Chinese trade data.

Exports plunged the most in seven months in September, spurring speculation that the People's Bank of China may need to extend the yuan's 6 per cent decline this year against a trade-weighted index.

"The poor trade data lend support to yuan depreciation against both the dollar and the yuan index," said Irene Cheung, a foreign-exchange strategist at Australia & New Zealand Banking Group Ltd in Singapore.

"The break beyond 6.7 a dollar after the holidays is significant."

The yuan was little changed at 6.7245 against the greenback as of 10:24am in Shanghai, according to China Foreign Exchange Trade System prices. The currency fell to a six-year low earlier this week as the PBOC weakened its daily reference rate beyond 6.7 for the first time since 2010. In Hong Kong's overseas market, the currency was unchanged for the day and down 0.4 per cent for the week. Chinese mainland markets were closed for the whole of last week.

China's renewed export weakness is coinciding with increased measures to cool the property and corporate debt markets, which stoke expectations policy makers will allow further yuan depreciation. The currency will drop to 8.1 against the greenback by end-2018 as government efforts to cool the housing market, easier monetary policy and higher US borrowing costs spur capital outflows, according to Deutsche Bank.

The German lender's concerns follow comments from Goldman Sachs Group Inc, which warned that the nation's outflows may be larger than they look because an increasing amount of capital is exiting the country in yuan rather than in US dollars.

Their bearish outlooks contrast with that of the Chinese currency's top forecaster, Landesbank Baden-Wuerttemberg, which predicts the yuan may start to rebound toward the end of next year. The median forecast in a Bloomberg survey is for the yuan to finish this year at 6.75, and end 2018 at 6.82.

Easing Odds

Official data Friday showing that China's factory-gate prices rose for the first time since 2012 in September may not be very good for China because it reduces the chances of monetary easing, said Xia Le, chief Asia economist in Hong Kong at Banco Bilbao Vizcaya Argentaria SA.

In the money markets, the PBOC drained a net 409.5 billion yuan (S$84 billion) via open-market operations this week, after injecting 60 billion on Oct 8 and 9 as banks reopened.

The central bank also offered 301 billion yuan via its Medium-term Lending Facility to commercial lenders on Thursday in six-month and one-year agreements, as 259.5 billion yuan of three- and six-month loans came due.

The overnight repurchase rate, a gauge of interbank funding availability, fell 23 basis points from before the holidays to 2.11 per cent on Friday, weighted average prices show. Government bonds gained, with the yield on 10-year notes falling four basis points in the period to 2.70 per cent, according to National Interbank Funding Center prices.

BLOOMBERG