China's yuan steadies, but still posts record weekly loss

HONG KONG: China's yuan hit a 13-month low on Friday and posted its biggest weekly drop after the central bank stepped up efforts to shake out hot money from the market, although traders said there were signs the currency may be finding a base.

This week's fall took the yuan's year-to-date losses to 2.8 percent, unwinding the gains it made in 2013, after a descent the market said was engineered by the central bank to introduce risk and curb funds flowing in to ride a one-way bet.

The yuan closed at 6.2250, up 0.04 percent from Thursday's close of 6.2275 -- the first time this week it has posted a stronger close. In chaotic early trading, it hit a low of 6.2370, the weakest since Feb. 25, 2013 and towards the bottom of its permitted trading range.

"The supply and demand for dollars today was relatively balanced," said a trader at a Chinese bank in Shanghai. "I think 6.25 will be the bottom of this round of depreciation and more two-way volatility will be seen this year."

The People's Bank of China (PBOC) set the midpoint for yuan trading at 6.1475 per dollar, weaker than Thursday's fixing of 6.1460. It has progressively lowered the daily midpoint this week, signalling comfort with the yuan's losses.

At its low on Friday, the yuan was 1.5 percent below the central bank's fix - a move impossible until this week after the central bank doubled the permitted trading range to 2 percent either side of the midpoint.

HSBC economists said the band widening, announced last weekend, was likely a policy move to increase the role of market forces on the yuan rather than an economic stimulus measure.

"We think the moves are more indicative of the market reacting to economic data and adjusting their outlook accordingly, rather than any attempt at competitive devaluation," they wrote in a report.

BIGGEST WEEKLY FALL

For the week, the yuan lost more than 1.2 percent to post its biggest weekly loss, based on Thomson Reuters data going back to 1992.

Some traders and analysts think the yuan may have now seen the worst of its fall, saying fundamentals including a trade surplus and massive foreign reserve holdings were supportive.

"The CNY has experienced a deep correction," analysts from Credit Agricole said in a report, forecasting it to strengthen to 6.16 per dollar in one month, and 5.99 in a year.

"In the short term, risks are skewed to the downside, albeit modestly, as the drivers of the correction remain in place. Further out, we continue to look for an appreciation of the CNY helped by China's healthy external balance."

A run of disappointing data showing China's economy lost steam at the start of 2014, and the country's first domestic bond default and subsequent media reports of trouble at other companies have added to pressure in its financial markets.

ING's Asia economist Tim Condon said the setting of weaker midpoints for the yuan suggested speculative funds were flowing out, but expected investors would find their appetite for risk again and push the yuan back towards 6 per dollar.

And market measures of volatility moderated and derivatives were pointing to some stabilisation.

One year-implied volatilities on dollar/yuan, an indicator of perceived swings in the Chinese currency, showed signs of peaking out near 2.2 vol after more than doubling from below 1 vol in mid-February.

One month risk-reversals on the offshore yuan, an indicator of how much option markets believe the yuan will move, have settled after jumping sharply late last month.

In the non-deliverable forwards market, one-year contracts were pricing the yuan at 6.2260 per dollar, stronger than a low of 6.2405 on Thursday and broadly signaling no change from current levels.

"We are starting to see some enquiries from our hedge fund customers on the yuan, but it is too soon to call a bottom," said a currency sales trader at a European Bank in Hong Kong.

"A clear sign from policymakers would mark the turning point here," he said.

That may be near. Premier Li Keqiang said this week investment and construction plans will be accelerated to ensure demand expands at a stable rate - an indication authorities are considering steps to support growth.