Yuan declines after PBOC weakens fixing by most since January

[HONG KONG] The yuan traded offshore fell for a second day after China's central bank weakened the daily reference rate by the most since January as a gain in the US dollar drove declines in Asian currencies.

The yuan traded in Hong Kong dropped 0.2 per cent to 6.4760 a US dollar as of 10:20 am local time. The People's Bank of China reduced the fixing, which restricts onshore moves to 2 per cent on either side, by 0.3 per cent to 6.4824, the most since Jan 7. The currency traded in Shanghai retreated 0.13 per cent, according to China Foreign Exchange Trade System prices.

The Bloomberg Dollar Spot Index gained 0.3 per cent on Friday, ending a two-day decline after US Federal Reserve officials unexpectedly cut their projections for interest-rate increases to two this year from the four forecast in December. A gauge of developing-nation currencies fell for a second day on Monday.

"The markets felt that the dollar weakness last week was too sharp and so we're now seeing a correction across Asian currencies," said Irene Cheung, a strategist at Australia & New Zealand Banking Group Ltd.

"Fundamentally we think the dollar should be stronger and that will lead to further softness in emerging markets."

Capital Outflows

People's Bank of China governor Zhou Xiaochuan said on Sunday that he's targeting a yuan that's not "completely free floating" and that given the speed of the increase in capital inflows in the past, it's only natural that outflows should be quick as well. He made the comments at the China Development Forum in Beijing.

A Bloomberg replica of the CFETS RMB Index, which China uses to measure the yuan's performance against 13 currencies, gained 0.03 per cent after falling on Friday to its lowest since Dec 2014.

"The weaker yuan fix also reflects how the PBOC is managing the currency against the basket so that they're not being held hostage to what the dollar is doing all the time," said Eddie Cheung, a Hong Kong-based currency strategist at Standard Chartered Plc.

Policy makers should make the currency's moves less predictable, former Fed chairman Ben Bernanke said in an interview with Caixin magazine published Monday. He said capital outflows may worsen if the market expects a gradual depreciation. Significant weakness would export deflation to other countries and backfire on China, he added.

Tobin Tax

International Monetary Fund managing director Christine Lagarde said on Sunday that the yuan is broadly in line with market fundamentals, and it may well be that for too long a lot of investors were used to having an appreciating currency. She made the comments at the China Development Forum in Beijing.

China is drafting rules for a levy on foreign-exchange transactions, people familiar with the matter said last week. PBOC deputy governor Yi Gang said on Saturday that a Tobin Tax is currently still an academic subject.

In the money markets, the PBOC further increased injections in open-market operations on Monday, helping to weigh down money-market rates. The central bank auctioned 130 billion yuan (S$27 billion) of seven-day reverse-repurchase agreements, compared with 110 billion yuan on Friday, and less than 50 billion yuan in the two weeks before that.

The seven-day repurchase rate, a benchmark gauge of interbank funding availability, fell five basis points to 2.27 per cent, according to weighted average prices from the National Interbank Funding Center.

BLOOMBERG