China’s offshore yuan fell to a nine-month low against the US dollar early on Friday as the greenback strengthened further overnight.
Analysts say the yuan, which was just included in the International Monetary Fund’s special drawing rights basket, faces increasing pressure to depreciate the rest of the year as strong data from the US makes a rate hike likely by year-end.
The People’s Bank of China will let the yuan’s drop in the fourth quarter “since the currency has been included in the SDR basket while the dollar has strong support from good economic data,” said Kenix Lai, a senior market analyst in Hong Kong for Bank of East Asia.
But the central bank will also control the pace of depreciation and will likely intervene if the yuan falls too quickly, just like what it did in January, said Lai who expects the yuan to drop to 6.8 per dollar by year-end.
The yuan touched 6.7182 per dollar in early Friday morning trade, its lowest since Jan. 7. It has depreciated about 0.6 percent this week.
China’s onshore markets are closed for the National Day holiday from Oct. 1-9. The spread between onshore and offshore yuan spot rates has now widened to more than 400 pips.
“China’s economy is steady and shows positive signs as exports, retail and industrial output in August all rebounded,” said Ying Jian, a senior analyst at Bank of China Hong Kong.
“The pace of foreign exchange reserve contraction also slowed down significantly which will underpin yuan FX rate,” he said. “Though the CNH has fallen below 6.7 per dollar, it will not deviate too much from this level.”
On Friday, China reported its foreign exchange reserves fell for a third straight month in September and by slightly more than markets had expected, suggesting fresh capital outflows from the world’s second-largest economy.
The U.S. dollar gained on Thursday against a basket of currencies, hitting its highest level in more than two months, as strong labour market data gave support to a possible U.S. interest rate hike later this year.
The yuan joined the SDR basket on Saturday in a milestone for Beijing’s campaign for recognition as a global economic power. Some China watchers fear that Beijing’s commitment to further market opening and financial sector reforms will fade after its diplomatic success.
However, the PBOC said on Sept. 29 that the yuan’s inclusion in the SDR basket will help stabilise it against a basket of currencies.
On Thursday, a Reuters poll showed the closely-managed Chinese yuan will depreciate about 3 percent until the end of September 2017, similar to the amount it has lost since January.