Yuan drops on bank policy change; US dollar steady

London

CHINA'S yuan fell on Monday after the People's Bank of China (PBOC) changed its reserve requirements policy, a move seen as a bid to curb recent yuan appreciation, while the US dollar index held near three-week lows.

The onshore and offshore yuan both fell 0.8 per cent against the US dollar after China's central bank said on Saturday that it would lower the reserve requirement ratio for financial institutions when conducting some foreign exchange forwards trading.

The yuan reached a 17-month high on Friday in both onshore and offshore trade. It has gained around

6 per cent against the greenback since late May, driven by a favourable yield differential between China and other major economies. But on Monday the offshore yuan was on track for its biggest daily decline against the dollar since March, changing hands at 6.7446 at 9.21am GMT.

"It's probably people covering long China positions," said Neil Jones, head of FX sales at Mizuho. "There's an element of liquidating long China positions because globally the market generally has been quite upbeat on China."

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The PBOC's move to end the requirement for banks to set aside cash to cover yuan forward transactions would make it easier to short the yuan, said RBC's head of Asia FX, Alvin Tan. "This is being interpreted as a subtle signal from the PBOC to restrain the speed of the yuan's rise, but how much of a restraint will become clearer with the upcoming daily fixings," he said. HSBC strategists wrote in a note that the policy change was unlikely to reverse the downward trend in dollar-yuan.

The move was also cited by analysts as a reason for weakness in the China-sensitive Australian dollar, which was down 0.3 per cent on the day at 0.72205 at 9.25am GMT. The New Zealand dollar was down 0.3 per cent at 0.6653.

The US dollar index was steady, having seen its biggest loss in six weeks on Friday, when investors upped their bets that a fiscal stimulus package would be agreed on to mitigate the economic fallout from Covid-19. The Trump administration called on Congress to pass a stripped-down version of the relief bill on Sunday, while negotiations on a broader package continue. The US dollar has been buffeted by the on-again, off-again stimulus negotiations.

With Nov 3 election only weeks away, investors are betting that Democrat Joe Biden is more likely to win the US presidency and offer a larger economic package. REUTERS