Yuan Drops to 16-Month Low Against Basket as China Backs Growth

The yuan fell to a 16-month low against a currency index tracked by the central bank, increasing speculation that China is managing a trade-weighted depreciation even as it strengthens its daily fixing against a declining dollar.

A Bloomberg replica of the CFETS RMB Index, which measures the yuan against 13 Exchange rates, dropped below 98 for the first time since 2014, boosting the outlook for the nation’s exporters. This comes even as the Chinese currency surged against the greenback, which retreated on indications that the Federal Reserve will hold off on raising interest rates in the immediate future.

"As the CFETS basket weight was based on trade factors, a lower yuan index will lead to higher competitiveness of China exporters, which will in turn provide some support to the nation’s growth," said Ken Cheung, a currency strategist at Mizuho Bank. "As the dollar is losing momentum against its major peers, there could be further downside for the yuan index."

The onshore yuan advanced 0.33 percent to 6.4851 a dollar as of 11:10 a.m. in Shanghai, according to China Foreign Exchange Trade System prices. The currency traded in Hong Kong rose 0.04 percent to 6.4903, prices compiled by Bloomberg show. The PBOC raised its daily fixing by 0.34 percent, compared with a 0.8 percent drop in the greenback overnight.

Dollar Effect

China’s exports slumped 25 percent in February from a year earlier and a gauge of overseas orders contracted for the 17th month in a row. The PBOC may have been buying dollars recently to replenish its declining foreign-exchange reserves, said Andy Ji, a Singapore-based foreign exchange strategist and economist at Commonwealth Bank of Australia.

The yuan fell against the basket probably because other exchange rates advanced more than the Chinese currency did versus the greenback, said Mizuho’s Cheung. The euro, which has the second-biggest weighting in the index after the dollar, rose 0.9 percent against the greenback on Tuesday and the yen climbed 0.7 percent, compared with the yuan’s 0.07 percent advance.

To contact Bloomberg News staff for this story: Tian Chen in Beijing at tchen259@bloomberg.net. To contact the editors responsible for this story: Richard Frost at rfrost4@bloomberg.net, Robin Ganguly, Allen Wan

By: Bloomberg News

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