China’s yuan weakened against the dollar on Wednesday after the central bank set its official midpoint rate for the currency at its lowest level in more than 4-1/2 years.
The People’s Bank of China (PBOC) set the yuan midpoint rate at 6.5314 per dollar prior to market open, 0.22 weaker than the previous fix 6.5169, the biggest fall between daily fixings since Nov 3.
The spot market opened at 6.5272 per dollar and was changing hands at 6.5464 at midday, 0.47 percent weaker than the previous close at 23:30 local time.
“It is really difficult to understand,” said a dealer at an Asian bank in Shanghai, referring to the sharply weaker midpoint on Wednesday. “Maybe the central bank tended to test the market reaction that whether investors can accept a faster pace of depreciation.”
The market is anticipating more yuan weakness in 2016, based on the slowing growth of the world’s second-largest economy and divergence in the value of the yuan onshore and offshore.
Activity in China’s services sector expanded at its slowest pace in 17 months in December, a private survey showed on Wednesday, in a further indication that China’s economy may be losing steam.
On Wednesday, the offshore yuan was trading 1.96 percent softer than the onshore spot at 6.6770 per dollar by midday. It hit an intraday low of 6.6799, nearly reaching its record low of 6.6830.
The spread between the onshore and offshore yuan hit its widest level in more than four years on Tuesday after the central bank was suspected to have intervened in the onshore market to support the currency.
Tuesday’s intervention was now seen an expedient step to cushion a slump in China’s stock market on Monday, while the PBOC had largely stayed on the sidelines on Wednesday, traders said. Beijing has said it is moving towards valuing the yuan’s exchange rate on a trade-weighted basis, loosening the Chinese currency’s peg to the greenback.
As such, the PBOC appears to have largely tolerated the yuan’s weakness against the dollar since late November when the International Monetary Fund announced its admission of the currency into its benchmark Special Drawing Rights basket, leading to a 2.1 percent depreciation by Wednesday.
The onshore yuan was trading against the euro at 7.0463, 0.3 percent softer than the previous close. It weakened nearly 1 percent against the Japanese yen at 5.5264 to 100 yen by midday.