Yuan drops most since August, losses mount in extended trading

China’s yuan fell the most since August, hastening its decline in extended trading hours on speculation the authorities stopped supporting the currency late in the day.
While trading will carry on till 11:30 p.m., as of yesterday, the central bank will continue to use the 4:30 p.m. price as the closing level, it said last month. This is significant because the monetary authority’s new system of setting the yuan’s daily fixing uses the previous day’s close as one of the factors. Major Chinese banks, which tried to sell dollars during most of the day, significantly reduced their offerings after 4 p.m., according to two currency traders.
The yuan retreated 0.61 percent to 6.5332 a dollar as of 5:49 p.m. in Shanghai, according to China Foreign Exchange Trade System prices. That’s a decline of 0.24 percent from the 4:30 p.m. level of 6.5172. The currency traded in Hong Kong’s offshore market fell as much as 1 percent to a five-year low of 6.6329.
“The central bank’s tolerance for a weaker yuan is much higher now as it wants to make the currency more market-driven,” said Xia Le, a Hong Kong-based economist at Banco Bilbao Vizcaya Argentaria SA. “The longer trading hours will help narrow the gap between the yuan’s exchange rates in Shanghai and Hong Kong. That’s because the onshore rate will be available during the European session, so it’ll have a bigger influence on the offshore unit.”
Liquidity outside of regular Asia hours can be relatively poor, heightening the risk of unrepresentative exchange rates and manipulation, the People’s Bank of China said while announcing the extended trading hours in December. The nation aims to provide more channels for trading of the yuan, which will help converge the currency’s onshore and offshore rates, the PBOC said.
The PBOC cut its reference rate for the yuan by 0.15 percent to 6.5032 a dollar yesterday, the weakest since May 2011. The monetary authority has reduced the reference rate by 0.49 percent in the past five sessions.
“The trend for the yuan to weaken is continuing in the new year as the PBOC weakens the currency’s fixing,” said Eddie Cheung, a Hong Kong-based currency strategist at Standard Chartered Plc. “The currency will drop further in the first quarter as China makes the exchange rate more market-driven.”
The nation’s policy will lean toward “a loosening bias” in 2016, as more supportive measures could provide a buffer to slower growth, Goldman Sachs Group Inc. economists led by Maggie Wei wrote in a note. Bloomberg