Sing dollar falls sharply; market 'shocked' by weaker yuan fixing

Singapore

THE Singapore dollar fell sharply on Wednesday after a weaker-than-expected yuan fixing by China's central bank.

The SGD was quoted at a low of 1.4342 to the US dollar at 2.34 pm on Wednesday, but recovered slightly to 1.4320 at 4pm, down 0.5 per cent from Tuesday's 1.4254, according to Bloomberg. At 1.4342, it would be at the same level of the previous 52-week low on Oct 2, 2015.

Wednesday's move up in the USD-SGD could largely be due to the 150 basis-point jump in the USD-CNY fixing, said Saktiandi Supaat, Maybank head of foreign-exchange research.

This is due to the much weaker yuan reference rate that the People's Bank of China (PBOC) had set at 9.15 am, said United Overseas Bank economist Francis Tan.

"Market was shocked by it, I think, and felt that there could be some competitive devaluation coming up and so start to short SGD (and even regionals too)," said Mr Tan. The Asian dollar index had fallen 0.44 per cent since 9.15 am, he noted.

The yuan fell to a five-year low after the PBOC cut its daily fixing to the lowest level since April 2011, weaker than the yuan's last onshore closing level, reported Bloomberg.

The yuan depreciation accelerated on Wednesday after the PBOC unexpectedly set the USD-CNY fixing higher, said Tommy Xie, OCBC Bank economist.

"It seems the Chinese government has given up its spread intervention after the CNY-CNH spread is no longer the hurdle for RMB to be recognised as a freely usable currency," said Mr Xie. CNH refers to offshore renminbi (RMB).

He also said that the latest clampdown on cross border arbitrage also suggests that it makes no economic sense for China to intervene in the spread.

Chinese regulators are paying more attention to cross-border arbitrage activities, he said. The latest news that a number of foreign banks have been suspended for transacting cross-border RMB business in late December following the 0.3 per cent penalty margin implemented from September suggests China's commitment to stop banks from gaming the system.

Standard Chartered is among three lenders that China's central bank last week suspended from conducting some foreign exchange business until the end of March, reported Reuters, citing two sources on Wednesday.

"Since December, we have been more confused about the RMB policy. The fear of unknown has become the largest risk for RMB in the near term," said Mr Xie.