Yuan swings back to losses as Brexit concerns overshadow Fed

[HONG KONG] China's yuan fell, bucking a stronger central bank fixing, as concern over Britain's possible departure from the European Union overshadowed dovish comments from the Federal Reserve.

With a week left before a June 23 British referendum on whether the nation should remain in the EU, five of the last six published polls predict an exit. A gauge of dollar strength pared declines on Thursday amid demand for havens after sliding the most in a week overnight as the Federal Open Market Committee voted unanimously to leave interest rates steady.

The yuan fell 0.09 per cent to 6.5847 a dollar as of 10:08 am in Shanghai, China Foreign Exchange Trade System prices show. The exchange rate etched out five-year lows in the past two days before a resurgence on Wednesday that prompted Oversea-Chinese Banking Corp to say that the People's Bank of China could be propping up the currency to avoid exacerbating depreciation pressures.

The yuan traded in Hong Kong's offshore market dropped 0.02 per cent even as the PBOC strengthened its reference rate by 0.4 per cent.

"The PBOC raised the yuan's fixing because the dollar weakened overnight due to a dovish Fed," said Irene Cheung, a foreign-exchange strategist in Singapore at Australia & New Zealand Banking Group Ltd.

"But now the market has shifted its focus to the UK referendum, and investors are buying safe- haven assets such as the dollar. That's why the dollar weakness we saw yesterday will be temporary and Asian currencies, including the yuan, are trending lower."

A measure of expected swings in the yuan rose to an 11-week high on Wednesday amid uncertainty over Fed policy and as MSCI Inc said it wouldn't include Chinese stocks in its global benchmark indexes.

MSCI, whose emerging-market gauge 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.

China has taken several steps to support the yuan this year, including selling dollars and getting officials to talk up the currency. Chinese holdings of US stocks sank about 38 per cent from the end of July through March, suggesting the PBOC was under pressure to raise dollars and smooth the yuan's depreciation.

In the money markets, the PBOC has pumped in a net 65 billion yuan (S$13.33 billion) via reverse-repurchase operations so far this week, data compiled by Bloomberg show. The central bank injected another 80 billion yuan on Thursday by auctioning three-month treasury deposits.

The seven-day repo rate, a gauge of interbank funding availability, fell four basis points, the most since June 2, to 2.26 per cent, according to National Interbank Funding Center prices. The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repo rate, was little changed at 2.53 per cent.

BLOOMBERG