Offshore yuan sinks to weakest level in two and a half months
Looming IMF review opens up window for bearish bets
The yuan traded at its weakest level in two and a half months in the offshore market on Friday as traders bet on Beijing loosening up on currency intervention once the International Monetary Fund gives its verdict on the yuan’s inclusion in an exclusive basket of currencies.
Offshore yuan, also known as CNH, fell more than 200 basis points, or 0.3 per cent, to 6.45 against the US dollar, the weakest level since September 9. The gap with its onshore counterpart, the CNY, has widened to more than 600 basis points, the largest since September 9.
Meanwhile, CNY continued to hover around a three-month low of 6.39 against the US dollar throughout the week.
The market is concerned that once the IMF decision is announced the Chinese government will dial down the intervention and let the exchange rates go
The relatively sharp depreciation was due to heightened market expectation that once yuan joins the IMF’s Special Drawing Rights basket, the People’s Bank of China will dial down intervention and let the currency flow more freely, said Becky Liu, senior Asia rates strategist at Standard Chartered Bank (HK).
“PBOC has to reduce the bulk of intervention in the forex market, if it were to maintain an independent monetary policy and open up the capital account,” she said.
The IMF executive board is due to vote on Monday on whether to include the yuan in the SDR, a quasi-currency. Inclusion in the basket would be viewed as a symbolic vote of confidence in the mainland currency.
“The market is concerned that once the IMF decision is announced the Chinese government will dial down the intervention and let the exchange rates go. The market is betting on such a scenario,” Liu said.
Monday’s IMF vote is widely expected to go in the yuan’s favour, with the remaining suspense now centred around its weighting in the SDR basket.
“What the market is looking for are the details in the decision. Without doubt, if there is any negative or lower-than-expected yuan element, a lower weighting, for example, the CNH will see the initial reaction,” said Gerrard Katz, managing director and head of Asia FX at Scotiabank.
“The widening CNY-CNH basis we see today could be corrected at some stage next week. After the IMF decision, we can expect more volatility in the RMB related exchange rates,” he added.
A large CNY-CNH gap has been highlighted by the IMF as an adverse factor on yuan’s potential weight, as it poses operational difficulties to global reserve managers who wish to hold more yuan-denominated assets.
Friday’s 5.5 per cent fall in the Shanghai Composite Index, the biggest retreat of the mainland stock market in three months, was also weighing on sentiment in the forex market, Katz said.
