Yuan extends declines as Paris attacks overshadow IMF support

An employee counting Chinese 100 yuan banknotes in Hong Kong, China, on Nov 12, 2015.
An employee counting Chinese 100 yuan banknotes in Hong Kong, China, on Nov 12, 2015. PHOTO: BLOOMBERG

BEIJING (BLOOMBERG) - The yuan dropped for a fourth day on Monday (Nov 16) as terror attacks in Paris spurred demand for safe-haven assets including the greenback and overshadowed an International Monetary Fund staff recommendation to add the Chinese currency to its basket of reserves.

The yuan fell as much as 0.11 per cent to a seven-week low of 6.3808 per US dollar in Shanghai, and was down 0.6 per cent as of 11:05 am local time. In Hong Kong's offshore market, it weakened 0.12 per cent. Twelve-month non-deliverable forwardsfor the currency were steady, after a 0.42 per cent slide on Friday that marked the biggest decline in two months.

IMF managing director Christine Lagarde announced late on Friday that her staff have recommended the Chinese currency be included in the fund's Special Drawing Rights, alongside the US dollar, euro, pound and yen. The recommendation makes approval by the fund's executive board this month all but certain, as major IMF shareholders including the US have said they will support inclusion if the yuan meets the Washington- based institution's criteria. The board will meet Nov. 30.

"Although an SDR inclusion is an important landmark for the yuan's internationalization, the IMF's approval was largely priced in and the news was not supporting the exchange rate today," said Nathan Chow, an economist at DBS Bank Hong Kong. "The Paris attack spurred safe-haven demand for the dollar and China's economy is still weak, which are reasons that are weighing on the yuan."

The People's Bank of China lowered the yuan's daily fixing for a 10th day, the longest stretch since 2008. It cut the reference rate, from which the onshore currency is allowed to trade as much as 2 per cent on either side, by 0.15 per cent to 6.3750 per US dollar, the weakest since Sept 25.

China devalued its currency on Aug 11 and concerns about further depreciation and slowing economic growth, coupled with the prospect of a US interest-rate increase, triggered a record exodus of funds and prompted the central bank to intervene to support the yuan.

"The market now expects the PBOC will have less frequent foreign-exchange intervention after the SDR deal," said Ken Cheung, a Hong Kong-based currency strategist at Mizuho Bank. "The PBOC will allow gradual depreciation for the onshore yuan with less frequent intervention and weaker fixings."

Mr Cheung expects the yuan to be trading in a "new range" of 6.4 to 6.45 a dollar.

Chinese financial institutions including the central bank bought foreign exchange in October for the first time in five months, a sign capital outflows abated. A gauge of their foreign-currency assets increased by 12.9 billion yuan (S$2.87 billion), after a record drop of 761 billion yuan in September, People's Bank of China data showed on Sunday.

The yield on 10-year sovereign bonds due October 2025 was unchanged at 3.16 per cent in Shanghai, according to prices from the National Interbank Funding Center.

"Data suggest that capital outflows have eased thanks to the effort by the PBOC in stabilizing the currency market," said Larry Hu, head of China economics at Macquarie Securities in Hong Kong. "However, given the recent strength of the US dollar, the yuan is still facing strong depreciation pressure in the near term. To be sure, the PBOC would not let the yuan go. But given the strong US dollar, the yuan would also weaken, just less compared with most other currencies."