China’s yuan weakens to five-week low as Fed rate signals renew pressure

Hong Kong: China’s yuan weakened to a five-week low, with the Federal Reserve’s signals of a potential interest-rate increase putting renewed pressure on Asian currencies.

China’s exchange rate fell as much as 0.24% as a gauge of dollar strength extended gains. The odds of a Fed rate increase in September shot up to 42% following comments from chair Janet Yellen that the case to raise US borrowing costs is getting stronger.

The yuan fell 0.08% to 6.6741 a dollar as of 11:55am in Shanghai, according to prices from the China Foreign Exchange Trade System. It dropped to 6.6850 earlier, the weakest since 20 July. The offshore currency erased declines after the People’s Bank of China released its daily fixing, and was last trading 0.06% stronger.

“In the medium-term, the yuan definitely faces depreciation pressure, but the Fed won’t raise rates that aggressively,” said Gao Qi, a strategist at Scotiabank in Singapore. “If U.S. inflation and non-farm payroll data are strong, then yuan depreciation pressures will increase next week.”

The PBOC weakened its reference rate, which limits onshore moves to 2% on either side, by 0.55% on Monday. The cut was less than that predicted by both Scotiabank and Australia & New Zealand Banking Group Ltd. The fixing suggests that the central bank will defend the 6.7 psychological level, said Iris Pang, senior economist for Greater China at Natixis SA.

Yellen comments

In light of the continued solid performance of the US labour market and the Fed’s outlook for economic activity and inflation, the case for an increase in the federal funds rate has strengthened in recent months, Yellen said in a speech Friday to central bankers and economists in Jackson Hole, Wyoming.

In the money markets, the seven-day repurchase rate fell eight basis points to 2.29%, according to a fixing from the National Interbank Funding Center. The PBOC offered 30 billion yuan ($4.5 billion) of 14-day reverse repurchase contracts at 2.4% Monday, as well as 60 billion yuan of seven-day agreements at 2.25%. Bonds declined, with the yield on 10-year government notes rising four basis points to 2.78%.

Data Saturday showed China’s industrial profits rose 11% from a year ago in July, compared with an increase of 5.1% in June. Reports due Thursday will also shed light on conditions for China’s manufacturers this month.

“Economic fundamentals improved in August from July,” Huachuang Securities Co. analyst Qu Qing wrote in a report. “The market will correct its pessimistic expectations for the economy.” Bloomberg