China Steps Up Yuan Rhetoric as Currency Falls to Six-Year Low
- Volatility gauge most muted in year as officials show support
- Previous verbal intervention attempts achieved limited success
The exchange rate isn’t likely to drop much more because a rally in the dollar is close to an end, according to a report Thursday in the Financial News, a central bank publication. The article follows comments from People’s Bank of China Deputy Governor Yi Gang that the nation will keep the exchange rate stable and that there’s no basis for persistent declines. Ma Jun, chief economist at the PBOC’s research bureau, added his voice to the defense, saying that the yuan’s depreciation in October has been driven mainly by the greenback’s advance.
“China is sending a signal that they are watching the yuan level closely and they want to make investors more cautious in building positions betting against the currency," said Ken Cheung, a foreign-exchange strategist at Mizuho Bank Ltd. in Hong Kong. "The impact of the rhetoric will be limited as they just repeat previous comments, and the yuan was driven by dollar strength. Such comments won’t reverse the greenback’s move."
Previous rounds of verbal intervention have preceded an escalation of meddling in the currency market. In January, the PBOC was suspected of starving the offshore market of yuan soon after a central-bank arm said there was no basis for depreciation. Still, officials have also proven themselves capable of surprises. On Aug. 13 last year, the PBOC cut its fixing by 1.1 percent a day after saying there’s no reason for a persistent drop.
The Chinese currency’s one-month implied volatility, which is used to price options, dropped 13 basis points to 3.61 percent as of 4:40 p.m. in Hong Kong. That’s the lowest since August last year. The currency traded in Shanghai’s spot market fell 0.1 percent to 6.7789 a dollar, taking its decline for the year to 4.2 percent. The offshore rate was trading near the weakest level in data going back to August 2010.
“The PBOC wants investors to know there’s no point to panic and if volatility surges, it will take measures to stabilize sentiment," said Gao Qi, a Singapore-based foreign-exchange strategist at Scotiabank. “The comments and a more transparent fixing have helped push volatility lower.”