Yuan Set for Biggest Monthly Loss Since Devaluation as Fix Cut

(Bloomberg) -- The yuan fell, heading for the steepest monthly decline since the August devaluation, after the Federal Reserve chief said an interest-rate increase could come in the next few months.

The yuan declined 0.26 percent to a three-month low of 6.5823 at 4:37 p.m. in Shanghai, extending losses this month to 1.55 percent. The People’s Bank of China cut the fixing by 0.45 percent to 6.5784 per dollar, the weakest level since February 2011, after the greenback strengthened. The U.S. currency is poised for the biggest monthly gain since September 2014 as Fed Chair Janet Yellen said on Friday higher interest rates in the coming months look “appropriate.”

“The dollar was further underpinned by Yellen’s comments about an ‘appropriate’ rate hike in the coming months last Friday, which led to more pressures for RMB to weaken against the dollar,” said Tommy Xie, a Singapore-based economist at Oversea-Chinese Banking Corp.

While the yuan slumped amid concern higher U.S. interest rates will spur outflows of the Chinese currency, the fixing is becoming more predictable as it appears the PBOC is allowing market forces to play a bigger role in setting the daily rate, according to OCBC. The central bank said in its quarterly monetary policy report that the fixing is decided both by the closing price and the performance of a basket of currencies. The reference rate is now decided by the PBOC based on 14 lenders’ submission of quotes, Sun Wei, deputy general manager of financial markets at China Citic Bank Corp., said in an interview.

Wider Band

“The fact that we are able to forecast the daily fixing more accurately shows that the yuan has been more predictable than unpredictable as the PBOC has been following its revised fixing mechanism closely in the past few weeks,” Xie said.

The yuan trading in Hong Kong fell 0.21 percent to 6.5899 per dollar, its lowest level since Feb. 3 and extending four weeks of losses in a row. The spread between the onshore and offshore rates, a gauge of depreciation pressure, narrowed to 0.0076, or 76 pips, after touching the widest level in three months on May 18. A Bloomberg replica of the CFETS RMB Index rose 0.09 percent to 97.29 on Monday, after snapping a two-week gain last week.

China should quietly allow wider moves in the yuan against a basket of currencies, a strategy that will reduce the cost of limiting declines, according to Yu Yongding, a former PBOC adviser.

“The currency basket should be allowed to fluctuate within a big band, at least 20 percent,” Yu said in Singapore on Friday.

Foreign Access

The yield spread between one-year China sovereign notes and U.S. Treasuries narrowed to 163 basis points, the least in more than seven weeks, data compiled by Bloomberg show.

The State Administration of Foreign Exchange issued detailed rules on foreign institutions’ access to the interbank bond market, saying there’s no limit for companies and no pre-approval checks needed to move funds in and out of China, according to a statement posted on its website Friday night. The regulation followed the central bank’s February statement that long-term investors from securities firms to asset managers no longer need to apply for quotas before they trade on the interbank bond market.

To contact Bloomberg News staff for this story: Helen Sun in Shanghai at hsun30@bloomberg.net. To contact the editors responsible for this story: Richard Frost at rfrost4@bloomberg.net, Allen Wan, Robin Ganguly

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