Markets Anticipate a Possible PBOC-Inspired Depreciation of the Currency
China’s yuan fell sharply in value against the dollar in offshore trading on Friday, as investors speculated the Chinese central bank could widen the currency’s daily trading band as early as this weekend, paving the way for it to depreciate further.
In New York trading, the price for the offshore yuan fell to 6.2887 per dollar, 2.5% lower than Friday’s official midday fixing in China by the central bank at 6.1370 per dollar.
The Chinese currency has two different exchange rates depending on whether it is traded on mainland China or offshore. Traders watch the offshore rate because it is more open to foreign investors and less subject to state control.
When the offshore rate trades below the mainland rate, it is typically an indication of weaker overseas demand for the currency. It can also be a sign investors believe the Chinese government will lower the official exchange rate.
The People’s Bank of China sets a daily reference rate for the yuan, then allows it to trade 2% above or below that level.
The speculation surrounding the yuan is the latest evidence of mounting pressure on global currencies exerted by the strengthening U.S. dollar. Central banks globally have also raced to lower interest rates and weaken their currencies in a bid to counter waning economic growth.
On Friday, Russia’s central bank unexpectedly cut its main interest rate, causing the ruble to fall. A day earlier, the Danish central bank trimmed rates into negative territory as pressure has mounted on the currency’s peg to the euro.
Friday’s trading put the offshore yuan below the PBOC’s daily trading band, meaning investors expect the central bank to continue a recent trend of nudging the yuan lower against the dollar.
A weaker currency helps a country’s exporters and potentially boosts economic growth. However, China’s government is worried about the potential for investors to pull cash out of the country as growth slows, a move that would be accelerated by a sharp decline in the yuan.
“People are betting for further depreciation,” said Win Thin, global head of emerging-market currency strategy at Brown Brothers Harriman.
Some investors even expect China to allow its currency to trade more freely by expanding the boundaries of its daily trading range. Last March, the central bank doubled the currency’s daily trading band to 2%.
“This indicates that the market is expecting the central bank to widen the band further,” said Michael Ning, a portfolio manager at First Eagle Investment Management.
Early this week, the central bank surprised the market by setting the midpoint rate for the yuan’s trading range higher despite the yuan’s fall against the dollar. Many market participants interpreted the move as a message that the authorities won’t allow sharp yuan depreciation. But nonetheless, the market continued to push the yuan weaker.
Some analysts dismissed the possibility of the Chinese central bank widening the fluctuation band. Indeed, further weakening of the currency could trigger more capital outflows and hurt liquidity in domestic markets. “I don’t think they’ll introduce big changes when markets are in distress,” Mr. Thin said, adding that currencies in Russia and Brazil are tumbling against the dollar. “That’s not the time to make currency policy changes, and I think China knows that.”
original source:http://www.wsj.com/articles/chinas-yuan-falls-on-speculation-over-central-bank-depreciation-move-1422655180