Yuan Trades Near Five-Week Low as Fed Signals Renew Pressure

(Bloomberg) -- China’s yuan traded near a five-week low, with the Federal Reserve’s signals of a potential interest-rate increase putting renewed pressure on Asian currencies.

China’s exchange rate fell as much as 0.24 percent as a gauge of dollar strength extended gains. The odds of a Fed rate increase in September shot up to 42 percent following comments from Chair Janet Yellen that the case to raise U.S. borrowing costs is getting stronger.

The yuan fell 0.15 percent to 6.6790 a dollar as of 5:57 p.m. in Shanghai, according to prices from the China Foreign Exchange Trade System. It dropped to 6.6850 earlier, the weakest since July 20. The offshore currency erased declines after the People’s Bank of China released its daily fixing, and was last trading 0.07 percent stronger.

“In the medium-term, the yuan definitely faces depreciation pressure, but the Fed won’t raise rates that aggressively,” said Gao Qi, a strategist at Scotiabank in Singapore. “If U.S. inflation and non-farm payroll data are strong, then yuan depreciation pressures will increase next week."

The PBOC weakened its reference rate, which limits onshore moves to 2 percent on either side, by 0.55 percent on Monday. The cut was less than that predicted by both Scotiabank and Australia & New Zealand Banking Group Ltd. The fixing suggests that the central bank will defend the 6.7 psychological level, said Iris Pang, senior economist for Greater China at Natixis SA.

Yellen Comments

"There might be some PBOC support in the market to prevent the yuan from falling quickly against the dollar, but not strong intervention to prop up the exchange rate," said Kenix Lai, a Hong Kong-based foreign-exchange analyst at Bank of East Asia Ltd. "Policy makers will want to defend the yuan at 6.7 in the coming months for G-20 and SDR inclusion. It’s not a good time to bet against the Chinese currency."

In light of the continued solid performance of the U.S. labor market and the Fed’s outlook for economic activity and inflation, the case for an increase in the federal funds rate has strengthened in recent months, Yellen said in a speech Friday to central bankers and economists in Jackson Hole, Wyoming.

In the money markets, the seven-day repurchase rate fell seven basis points to 2.30 percent, according to a weighted average from the National Interbank Funding Center. The PBOC offered 30 billion yuan ($4.5 billion) of 14-day reverse repurchase contracts at 2.4 percent Monday, as well as 60 billion yuan of seven-day agreements at 2.25 percent. Bonds declined, with the yield on 10-year government notes rising four basis points to 2.77 percent.

Data Saturday showed China’s industrial profits rose 11 percent from a year ago in July, compared with an increase of 5.1 percent in June. Reports due Thursday will also shed light on conditions for China’s manufacturers this month.

"Economic fundamentals improved in August from July," Huachuang Securities Co. analyst Qu Qing wrote in a report. "The market will correct its pessimistic expectations for the economy."

--With assistance from Jimmy Zhu and Tian Chen To contact the reporter on this story: Justina Lee in Hong Kong at jlee1489@bloomberg.net. To contact the editors responsible for this story: Richard Frost at rfrost4@bloomberg.net, Robin Ganguly

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