Yuan drops to lowest since July on trade data, swap-rate surge

A salesclerk waits for customers at a store selling packaged foods on Qianmen Street in Beijing

China’s yuan fell to the lowest level since July after the slowest export growth in seven months, and swings in interest-
rate swaps and bond yields fueled concern about the nation’s economic outlook.
The currency dropped 0.21 percent to close at 6.1855 per dollar in Shanghai, the weakest since July 29, according to China Foreign Exchange Trade System prices. It declined as much as 0.55 percent earlier yesterday, the most on a closing basis since December 2008. The spot rate has fallen 0.57 percent in two days, the most in almost nine months.
Interest-rate swaps touched a three-month high after policy makers narrowed the pool of corporate debt that can be used as collateral for short-term loans. Five-year sovereign yields climbed the most since November 2013 before closing one basis point lower at 3.73 percent. The swaps also retreated.
“Negative headlines including the surge in bond yields today [yesterday] triggered the sharp drop in the yuan,” said Ho Man Chun, a strategist at Bank of Communications Co.’s Hong Kong branch. “The trade data that missed expectations is another factor. We could see some unwinding of yuan products, given the bearish sentiment on the currency.”
Exports rose 4.7 percent in November from a year earlier, compared with the 8 percent median estimate in a Bloomberg survey, data showed Monday. Imports fell 6.7 percent, leaving a record trade surplus of USD54.47 billion.
The People’s Bank of China boosted the yuan’s reference rate by 0.08 percent to 6.1231 per dollar yesterday, the strongest since March 7. The onshore spot rate was 1 percent weaker than the PBOC’s fixing, within the 2 percent limit. That’s the biggest discount since June.
One-month implied volatility in the onshore currency, a measure of expected swings used to price options, jumped 39 basis points, or 0.39 percentage point, to 2.91 percent. That’s the highest level since September 2012.
“The trade data triggered concerns about China’s economy and further easing, which are weighing on the yuan,” said Kenix Lai, a Hong Kong-based currency analyst at Bank of East Asia Ltd. “While the fixing indicates the central bank prefers a stable currency, the weaker spot rate suggests there could be some capital outflows.”
China’s economy is forecast to grow 7.4 percent this year, the slowest since 1990, according to the median estimate in a Bloomberg survey.
HSBC Holdings Plc cut its end-2015 yuan forecast to 6.22 per dollar from 6.10 on the expectation that monetary policy will be eased further, it said in a research note Monday. The PBOC may intervene if the yuan continues to decline, Liu Dongliang, an analyst at China Merchants Bank, wrote in a report Monday. The government’s central economic work conference, where Chinese leaders will likely map out plans for 2015, started yesterday, the Xinhua News Agency reported.
“The PBOC fixing shows the government isn’t engineering the decline, so it’s more about market sentiment,” said Bank of Communications’ Ho. “I expect the yuan to fluctuate around 6.20 for now. It’s very unlikely for a further sharp drop unless the central bank signals a turn in policy that favors a weaker exchange rate.” Fion Li, Bloomberg