Yuan heads for weekly drop amid economy concern, MSCI rejection

[HONG KONG] The yuan headed for the biggest weekly decline in a month, weighed down by weak economic data and MSCI Inc's decision to leave Chinese stocks out of its benchmark indexes.

Volatility in China's currency market rose to an almost three-month high this week as the spot rate fell beyond a five- year low last seen during January's turmoil.

Official data Monday showed China's fixed-asset investment in the first five months of this year trailed all 38 economists' forecasts, while the dollar pared dropped as Britain's possible exit from the European Union prompted haven demand.

The yuan fell 0.42 per cent this week, the most since May 13, to 6.5989 a dollar as of 9:54 am in Shanghai, China Foreign Exchange Trade System prices show.

It rose 0.03 per cent on Friday, paring the past month's decline to 1 per cent. The offshorecurrency traded in Hong Kong climbed 0.07 per cent from June 10.

"If we do see a Brexit scenario, that would potentially be more dollar positive so potentially some move higher for dollar-yuan," said Eddie Cheung, a currency strategist at Standard Chartered Plc in Hong Kong.

"But in an event we avoid a Brexit, then potentially the dollar would be flatter to lower and more risk-on."

Anxiety over the unchartered territory that a vote for Brexit could usher in, and the aptitude of central banks to enforce stability amid such an event, have helped erase about US$2 trillion of global equity value over the past week. Campaigning for the June 23 referendum was halted through Friday after a UK lawmaker was killed.

MSCI, whose emerging-market index is tracked by investors with US$1.5 trillion in assets, cited the need for additional improvements in the accessibility of China's share market and said that it would reconsider inclusion in 2017.

The People's Bank of China may attempt to support the yuan around the 6.60 level as a breach could shift the currency's technical outlook toward a more bearish side, Ken Cheung, Asia foreign-exchange strategist at Mizuho Bank Ltd, wrote in a note.

BLOOMBERG