The Chinese yuan fell to its weakest level against the U.S. dollar since late 2010, after China’s central bank weakened its benchmark rate by the biggest margin since a one-off devaluation in August 2015.
The yuan was fixed at 6.6375 to the U.S. dollar from Friday’s midpoint of 6.5776, the weakest level for the domestic currency since Dec. 24, 2010. The People’s Bank of China slashed the yuan’s parity rate by 0.9%, compared with last summer’s 1.1% devaluation.
In the onshore market, the yuan now trades at 6.6408, its weakest level against the U.S. dollar since Dec. 24, 2010. In the offshore market in Hong Kong, the yuan traded at 6.6587, its cheapest level against the dollar since Jan. 11.
The sharp move in the daily yuan fixing reflects volatility in currency markets following the U.K.’s decision to leave the European Union. The onshore yuan traded 0.4% weaker compared with its Friday closing value, which was less significant than Monday’s fix because the currency had been able to reprice. The Chinese currency is allowed to move by up to 2% on either side of the daily fix.
The prime reason for the sharply higher onshore fix was the 2.5% rally in the U.S. dollar index on Friday, as haven currencies surged following the “Brexit” referendum.
The British pound plunged 8.1% against the U.S. dollar on Friday, but its effect on the yuan is relatively limited as it makes up just 3.86% of the basket of currencies used by the China Foreign Exchange Trade System to track the yuan’s trade-weighted value. By contrast, the U.S. dollar accounts for more than a quarter of the weighting.
Pressure on the British pound intensified in Asia morning trading on Monday. The U.K. currency fell 2.2% to 1.3386 against the U.S. dollar. The euro also weakened 1.2% to 1.0990 against the dollar.
Investors had expected that China’s central bank would move to calm markets after the Brexit vote by keeping the yuan stable, wrote Zhou Hao, senior economist for emerging markets in Asia at Commerzbank AG.
“The market should be a little bit disappointed as most of the traders hoped that China’s central bank should offer some sort of ’stability’ amid rising market uncertainties,” he said. “Undoubtedly, today’s [yuan] fixing rates hint that the market should be prepared for more volatility.”
The yuan’s fall may be cushioned by the central bank again to avert panic selling. On Friday, traders said the PBOC moved to shore up the yuan’s value via an intervention in the onshore market, after the currency fell to its lowest level in nearly 5½ years due to concerns about the U.K. referendum.
On Monday, traders said the PBOC was at it again with the aim of preventing the yuan from falling too sharply, after it earlier dropped below 6.6400 against the dollar.
“But the intervention appeared to be not as forceful as it used to be, which is a hint that the central bank is probably happy to see the yuan depreciate further, as long as the pace is controllable, to help boost the economy,” a Shanghai-based senior trader at a domestic bank said.
“The sharply lower yuan fixing this morning also shows that the PBOC is trying to let the air out of the balloon a bit by bit, instead of seeing the bubble burst at one go,” the trader added.
Given the central bank’s more relaxed response thus far, selling pressure on the yuan doesn’t seem to be as heavy as was previously feared. “Many of our clients are actually waiting on the sidelines, trying to figure out how the entire world is still responding to the Brexit outcome,” the trader said.
The onshore-traded yuan has tumbled well past the 6.6000 psychological level, which could be a factor in changing the market’s view on the currency.
Something to watch for is the gap between the 1-month dollar-yuan nondeliverable forward contract and the 12-month contract. When it starts to widen, it implies investors are starting to become more bearish on the yuan.
Article by Ewen Chew, Gregor Stuart Hunter, Shen Hong via WSJ
Source: The Wall Street Journal