1. Yuan closes at 4-1/2 year low; how far will central bank let it go?

Yuan closes at 4-1/2 year low; how far will central bank let it go?

The yuan was also on track a loss of 0.8 percent this week, which would be the biggest weekly drop since the People's Bank of China (PBOC) on Aug. 11 surprised global markets with a nearly 2 percent devaluation.

By: | Shanghai | Updated: December 11, 2015 3:45 PM

Renminbi

China’s yuan closed at its lowest level in nearly four and 1/2 years on Friday, raising questions over how far Beijing will let the currency weaken.

The yuan fell 0.3 percent on the day, taking its losses this year to nearly 4 percent, but there were no signs of broader global market panic like that which China triggered in mid-August when it surprisingly devalued the currency.

Friday’s lowest point for the yuan was 6.4564 to the dollar, in the late afternoon, before it closed at 6.4553.

For the week, the yuan fell 0.8 percent, its biggest loss since the devaluation and a sixth straight week of declines – the longest such streak since December 2005, according to Thomson Reuters data.

After the currency on Friday morning breached a low hit in August after Beijing’s devaluation, major state banks were suspected of entering the market to help stabilise for the People’s Bank of China, traders said.

The central bank has been conspicuously absent from markets in recent sessions, leading many traders to believe it is content to let the currency to depreciate gradually in the face of the U.S. dollar’s relentless rise.

“The PBOC will move more aggressively from a managed float to a more market based FX policy, meaning little to no intervention which should lead to further weakness,” predicted Stephen Innes, senior trader at OANDA in Singapore.

A senior trader at a Chinese commercial bank in Shanghai said the government “has internal targets for the yuan, though we’re not certain of the ranges. But the market generally agrees 6.50 may be the upper limit the central bank is willing to permit this year.”

NO PANIC THIS TIME
August’s depreciation sparked strong PBOC intervention to support the currency, even though it said the devaluation was part of moves to let the yuan trade more freely.
Unlike in August, when they were stunned by devaluation, traders in China were calm about the yuan’s recent slide.

“Trading was quite normal, unlike a flurry of sales in August,” said a dealer at a European bank in Shanghai.

“The yuan is weakening all this week, but the market was less panic than in mid-August, leaving the central bank in no hurry to take action.”

Prior to Friday’s market opening, the PBOC set its official yuan midpoint rate t 6.4358 per dollar, its weakest level since Aug. 5, 2011.

The weak yuan was one factor hurting Chinese stock markets on Friday.

“If the yuan continues to depreciate, that’s negative to stocks as well, because it means investors are not confident about China’s economic restructuring,” said Linus Yip, chief strategist at First Shanghai Securities.

LINK WITH SDR MOVE?
The yuan started weakening a few days after the International Monetary Fund’s Nov. 30 announcement that the currency would enter its Special Drawing Rights (SDR) basket, a milestone in China’s integration into global finance.

Hours after the announcement, the PBOC said there was no basis for the yuan to continue to devalue, and made clear China would keep the currency basically stable as it would intervene when there were abnormal movements.

Markets were rife with speculation that Beijing would let the yuan depreciate after the SDR inclusion, and the performance this week appears to justify that view, some traders said.

However, other traders suspect the PBOC is increasing the volatility of yuan trading, letting it depreciate before the Federal Reserve’s U.S. rate decision next week, and will then guide it to appreciate afterwards.

Speculators have been burnt many times by the PBOC’s temporary tolerance of sharp yuan movements in one direction, followed by a hard strike back in the opposite direction.

“If the PBOC intervenes to defend the yuan’s value, the lower limit is likely to be 6.4 per dollar, leaving the yuan to move in a wide range of 1,000 pips,” said a dealer at another Chinese commercial bank in Shanghai.

In the offshore market, the yuan was quoted at 6.5356 per dollar, having lost 1.4 percent so far this week. The spread between onshore and offshore yuan widened to more than 800 pips.

Tags: BeijingYuan
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