[HONG KONG] The yuan tumbled the most in four months as China's markets reopened after a week-long break.
The currency fell 0.46 per cent in Shanghai to 6.7051 a US dollar, the weakest since Sept 2010. The offshore exchange declined by a similar magnitude during the holidays, while a gauge of the greenback's strength rallied one per cent.
Until today, China's central bank was speculated to be keeping the currency stronger than the 6.7 level as it sought to limit capital outflows. The People's Bank of China earlier set the yuan's daily fixing, which limits onshore moves to 2 per cent on either side, at 6.7008.
"This sends the signal that the yuan's future path may be more event-driven, meaning China will allow it to drift lower when there is a big event on the dollar as we saw last week," said Tommy Xie, an economist at Oversea-Chinese Banking Corp in Singapore.
"Today's spot will be very important and the market will closely watch whether the yuan will close beyond 6.7 or not."
China has been careful to manage the yuan's decline for fear of exacerbating capital outflows. In an indication that the PBOC sold US dollars to support the yuan, the nation's foreign-exchange reserves declined to US$3.17 trillion last month, the lowest since 2011. The currency entered the International Monetary Fund's Special Drawing Rights on Oct 1.
The onshore yuan has weakened 3 per cent against the US dollar this year, the most in Asia, and dropped almost 7 per cent versus a trade-weighted gauge as policy makers were seen encouraging declines to help an economy expanding at the slowest pace in more than two decades. Recent data on manufacturing, industrial profits and retail sales suggest that growth is stabilising, if not picking up.
"Chinese authorities will focus more on the trade-weighted index and ensure that any depreciation is gradual," said Roy Teo, senior currency strategist in Singapore at ABN Amro Bank NV, the yuan's second-most accurate forecaster as measured by Bloomberg Rankings.
"China doesn't just export to the US. The PBOC is unlikely to ease policy rates this year, given concerns on leverage. This will help support the onshore yuan."
The PBOC will use the yuan's daily fixing to push back against bets for further weakness, according to ING Groep NV, the third-most accurate forecaster for emerging-market currencies as measured by Bloomberg Rankings.
"The PBOC sees the widening onshore-offshore yuan gap for what it is: evidence of rising depreciation expectations," said Tim Condon, head of Asian research at ING Groep in Singapore.
"They also know that stabilising the yuan fixings cools such expectations and reduces speculative positioning."