Weak yuan not a product of 'engineering'

The current softening of the Yuan has been a by-product of market corrections and estimates of China's current economic growth, January 27, 2015. — Reuters pic
The current softening of the Yuan has been a by-product of market corrections and estimates of China's current economic growth, January 27, 2015. — Reuters pic

BEIJING, Jan 27 — China’s yuan rose by the most in four weeks as the central bank strengthened the reference rate after the currency’s biggest two-day slide since 2008.

The People’s Bank of China raised the daily fixing 0.03 per cent to 6.1364 a dollar after weakening it by 0.22 per cent over the previous two days. The onshore yuan fell to near the lower limits of its trading band yesterday and the greenback’s 14-day relative-strength index touched 69.8, near the 70 level that indicates to some traders the U.S. currency will weaken. Industrial profits fell 8 per cent in December, the most in data going back to late 2011, an official report showed today.

“Yuan moves today look like a technical rebound after significant declines in past sessions,” said Banny Lam, co-head of research at Agricultural Bank of China International Securities Co. in Hong Kong. “With a backdrop of weakening fundamentals in China and broad-based dollar strength, it’s hard to see much room for yuan appreciation for now.”

The yuan climbed 0.17 per cent, the most since December 30, to close at 6.2435 a dollar in Shanghai after dropping 0.72 per cent over the previous two days, according to prices from the China Foreign Exchange Trade System. The currency touched a seven- month low of 6.2569 yesterday and was a record 1.89 per cent weaker than the fixing. The discount narrowed to 1.72 per cent today.

No engineering

China isn’t trying to engineer yuan weakness, unlike what happened in the first half of 2014, and will push back against the weaker spot rate through fixings, Brown Brothers Harriman & Co strategists led by Marc Chandler wrote in a note yesterday.

The Bloomberg Dollar Spot Index rose to the highest level in data going back to late 2004 as the euro tumbled after the European Central Bank announced a bond-buying program last week. PBOC Deputy Governor Pan Gongsheng said the ECB stimulus was adding to depreciation pressure on the yuan.

A widening of the yuan’s trading band is unlikely without sustained pressure on the existing limits, Gareth Berry, a foreign-exchange strategist at UBS AG in Singapore, wrote in a research note yesterday.

The currency’s trading band was last expanded in March 2014 after it traded within 0.1 per cent of the strong end of the allowed range on most days between October 2012 and May 2013. Prior to that, the band was widened in April 2012 from 0.5 per cent, and before that from 0.3 per cent in May 2007.

One-month implied volatility in the yuan, a measure of expected swings used to price options, dropped 46 basis points, or 0.46 per centage point, to 2.43 per cent. The gauge surged 70 basis points yesterday in the biggest advance since 2011.

In Hong Kong’s offshore trading, the yuan strengthened 0.25 per cent to 6.2439 a dollar, data compiled by Bloomberg show. Twelve-month non-deliverable forwards advanced 0.27 per cent to 6.3493, a 1.7 per cent discount to the spot rate in Shanghai. — Bloomberg