Yuan jumps as official rate strengthened

The PBOC on Friday strengthened the yuan’s midpoint rate for the first time in nine days on Friday, fixing it at 6.5636 per dollar, compared with the previous fix of 6.5646.

China’s stock markets have also been in free fall since the start of the year, raising concern Chinese authorities are losing grip of the decelerating economy.

After opening in London, the offshore yuan had taken back all its losses to stand higher on the day at 6.6905.

“That would be a way of starting to stabilize the market”.

The dollar fell after minutes from the US Federal Reserve’s December meeting cited the strength of the greenback as a risk to the central bank’s objective of raising inflation toward its 2 percent goal. It has also created concerns that China’s neighbours will be forced to engage in their own competitive devaluation to keep their exports competitive, worsening regional instability. Investors seem reluctant to invest in China, as a weaker yuan would increase their translation losses, to ultimately dilute profitability.

The yuan dropped almost a percent against the Japanese unit, while the USA dollar fell as low as 117.69 yen – slipping below 118 yen for the first time since late August.

OCBC noted that against a basket of currencies, the RMB index was still only fractionally down for 2016, despite this week’s fixes against the dollar.

“Some forces attempt to make profit from speculating on the renminbi”, the People’s Bank of China said in an editorial posted on its website Thursday.

China’s foreign-exchange reserves declined by a historic US$108 billion (HK$842.4 billion) in December, reaching a three-year low of US$3.33 trillion as the central bank sold more dollars to prop up the yuan.

“Investors should bear in mind that the China equity falls are more correlated with short-term psychological factors rather than the underlying China economic conditions”, Ben Luk, a global market strategist at J.P. Morgan Asset Management, wrote in a note, cited by The Wall Street Journal. That said, most analysts believe the yuan’s decline is likely to be gradual, given China’s huge foreign reserves.

Investor confusion over China’s monetary and stock-market policies have sent Japan’s currency surging to its strongest level since August versus the dollar.

“The lower yuan fixing probably signifies greater risks to the Chinese economy than we know of”, said Jeremy Stretch, head of currency strategy at CIBC World Markets. A cheaper yuan, in theory, would boost Chinese exporters, who have been struggling.

The euro rose to 128.72 yen from 128.58 yen, while it weakened to $1.0885 from $1.0928 in United States trade. Japan’s Nikkei shed 1.8 percent in sympathy. An ill-thought-out “circuit breaker” trading halt system, which kicked in twice this week, also added to volatility.