China's Yuan Weakens to Four-Month Low After Key Level Breached - Yahoo Finance

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(Bloomberg) -- The yuan weakened past a key level that China had been defending for months, as traders made tentative bets that policymakers are ready to greenlight currency depreciation amid a sluggish economic recovery.

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The onshore yuan breached the 7.20 per dollar line it had mostly held since November on Friday. The weakness sent ripple effects across Asian markets, accelerating drops in some regional currencies and weighing on sentiment toward China-linked markets.

The catalyst for the move was People’s Bank of China lowering its daily reference rate for the managed currency by the most since early February. State banks also refrained from selling the dollar in large amounts at the open, according to traders.

“It seems like this move higher is triggered by the weaker fix,” said Fiona Lim, senior FX strategist at Maybank in Singapore. That sends a sign that the “PBOC is willing to allow some weakness in the yuan as the dollar gains a bit of bullish bias recently.”

While the PBOC has been anchoring the currency with the so-called fixing since last year, stress has been building of late amid a broad dollar rebound and weakness in Asian peers. The PBOC faces a difficult task of trying to stimulate the fragile Chinese economy with monetary easing while keeping the yuan relatively steady and preventing capital outflows.

Adding to the bearish sentiment was a US bill — which still faces major hurdles to becoming law — that mutual funds wouldn’t be able to invest in some products that track Chinese stock indexes. Key China stock gauges each slipped more than 1%.

Still, a sharp depreciation in the Chinese currency raises the risk of pushback from the PBOC, such as state bank selling of the dollar or verbal intervention. The central bank could also tighten liquidity in the offshore markets to make betting against the yuan more expensive.

“In any case, we reckon that the PBOC will guide to unleash the depreciation at a gradual pace, as a one-off and sharp yuan depreciation is not favorable to China’s growth recovery and financial market stability,” said Ken Cheung, chief Asian FX Strategist at Mizuho Bank Ltd.

--With assistance from Qizi Sun, Ran Li and Iris Ouyang.

(Updates with more details)