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Yuan drops most in four weeks as swiss shock spurs dollar demand

China's yuan fell the most in four weeks as the Swiss National Bank's surprise move to abandon a cap to the euro boosted demand for the greenback.

[HONG KONG] China's yuan fell the most in four weeks as the Swiss National Bank's surprise move to abandon a cap to the euro boosted demand for the greenback.

The Swiss franc jumped as much as 41 per cent yesterday in London after the central bank scrapped a three-year-old policy of preventing the currency from strengthening beyond the 1.20 level against the European single currency. China's exports rose 9.7 per cent in December from a year earlier, beating the 6 per cent growth predicted in a Bloomberg survey, according to official data released Jan 13. Imports fell 2.4 per cent, leaving a trade surplus of US$49.61 billion.

The yuan weakened 0.3 per cent, the most since Dec 18, to close at 6.2066 a dollar in Shanghai, China Foreign Exchange Trade System prices show. It gained 0.03 per cent this week.

"Market sentiment has definitely worsened in the short term and some investors are probably unwinding their positions to free up liquidity to get dollars," said Ho Man Chun, Hong Kong-based strategist at Bank of Communications Co's branch in the city.

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"This unwinding has nothing to do with China's fundamentals." The People's Bank of China raised the yuan's reference rate by 0.01 per cent on Friday to 6.1188 a dollar, capping a 0.18 per cent advance for the week. The onshore spot price traded 1.4 per cent weaker than the fixing, within the 2 per cent limit of its permitted trading range.

In offshore trading in Hong Kong, the yuan slipped 0.39 per cent on Friday and 0.28 per cent for the week to 6.2231, data compiled by Bloomberg show. Twelve-month non-deliverable forwards fell 0.47 per cent, the most since Dec 18, to 6.3265, 1.9 per cent lower than the spot rate in Shanghai.

Downward Pressure The pressure for the yuan to depreciate will increase as the SNB's removal of the franc cap implies an increasing possibility the European Central Bank will conduct quantitative easing, Everbright Securities Beijing-based economist Xu Gao said by phone. Speculation over a weaker euro will lead to a stronger dollar, Xu said.

Casualties mounted from the Swiss currency shock as the largest US retail foreign-exchange brokerage said client losses threatened its compliance with capital rules. FXCM Inc, which handled a record US$1.4 trillion of trades by individuals last quarter, said clients owe US$225 million on their accounts after SNB's decision roiled global markets.

Forex Reserves China's foreign-exchange reserves fell to US$3.84 trillion at the end of December, from US$3.88 trillion in September, according to official figures released on Thursday. They're still more than triple the size of any other country's holdings. The government is scheduled to release data on retail sales and industrial production next week.

The yuan declined as the Swiss decision boosted demand for the greenback, according to Dariusz Kowalczyk, Hong Kong-based strategist at Credit Agricole CIB.

"Also, foreign-exchange reserve data clearly point to continued capital outflows in December, with no reason for the trend to changed in January," Mr Kowalczyk said. "Next week's data will be yuan-negative and the currency has more near-term downside."