Yuan slips after relaxation of FX outflow curbs

Source:Reuters-Global Times Published: 2017/9/11 17:48:40

PBC scraps reserve requirements for renminbi’s forward positions

China's yuan eased slightly on Monday after rallying more than 1 percent against the dollar last week, with sentiment softening in the wake of a relaxation of controls on capital outflows.

Market participants said the latest lifting of restrictive measures on foreign exchange hedging and yuan deposits on the Chinese mainland suggested that the authorities had started to worry about the rapidly appreciating yuan.

The People's Bank of China scrapped reserve requirements of 20 percent for financial institutions, settling foreign exchange forward yuan positions while it lifted requirements for foreign banks to put aside reserves for offshore yuan deposits in China.

Monday's midpoint was 35 pips or 0.05 percent firmer than the previous fix of 6.5032 set on Friday. The central bank has guided the fixing higher for 11 straight sessions.

But traders said Monday's midpoint came in much weaker than their models had suggested, the same situation as last Friday. They suspected the weaker fixings were a result of the impact from the "counter-cyclical factor".

Economists at Goldman Sachs said in a note on Monday that the counter-cyclical factor had turned more reactive to the market appreciation pressures, potentially pointing to lower propensity to accommodate much more strength in the yuan.

The lower-than-expected fixing, together with the policy relaxation in capital controls, dragged the yuan down to weaker than the key 6.5 per dollar level.

The spot market opened at 6.5090 per dollar and was changing hands at 6.5169, 0.61 percent weaker than the previous late session close.

Gao Qi, FX strategist at Scotiabank in Singapore, said the yuan would weaken against the dollar in a "knee-jerk response to hopes for potential hedging flows", expecting the Chinese currency to consolidate around 6.5 per dollar for now.

The Chinese currency has risen more than 2,000 pips since the beginning of August.

"We believe that yuan appreciation will continue, but at a slower pace from now on," said Iris Pang, economist at ING.

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