Weekly Market Outlook

Yuan Nears Six-Year Low as Bears Seen Testing PBOC Tolerance

China’s currency fell toward a six-year low as yuan bears were seen testing the central bank’s tolerance for a weaker currency.

The exchange rate dropped as much as 0.16 percent, taking it close to 6.7 against the greenback amid speculation that the People’s Bank of China will ease back on support now that a Group of 20 gathering in Hangzhou has ended. The decline Tuesday suggest that the monetary authority may be starting to loosen some control, according to Iris Pang, senior economist of Greater China at Natixis SA in Hong Kong.

The yuan fell 0.05 percent to 6.6803 a dollar as of 12:35 p.m. in Shanghai, according to prices from the China Foreign Exchange Trade System. It weakened to 6.6877 earlier. The offshore currency erased declines to trade little changed in Hong Kong.

“Bears were testing the psychologically important level of 6.7, which appeared to have been the PBOC’s bottom line lately, but the central bank may have tried to support the exchange rate later,” said Kenix Lai, a Hong Kong-based foreign-exchange analyst at Bank of East Asia Ltd. “China will likely continue to defend 6.7 as the yuan will enter the International Monetary Fund’s basket of reserves in less than a month.”

Intervention Talk

Talk of PBOC intervention to support the currency was fueled by a series of stronger central bank fixings in July after the onshore rate slipped past 6.7 a dollar for the first time since September 2010. The yuan has dropped 0.6 percent versus the dollar since the start of August as Chinese data failed to quell concerns over the nation’s economic health and the Federal Reserve indicated it could raise borrowing costs this year.

Depreciation bets have resurfaced in the derivatives market, with a three-month measure of expected yuan price swings surging the most since January last month amid concern policy makers will allow the yuan to weaken between the G-20 meeting and the yuan’s entry into the IMF’s reserves on Oct. 1. The gauge fell 17 basis points to a two-week low on Tuesday.