The exchange rate isn’t likely to drop much more because a rally in the dollar is close to an end, according to a Thursday report 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.”
A gauge of the dollar’s strength has climbed 2.2 percent since the end of September as investors speculate that the U.S. Federal Reserve is readying an interest-rate increase. The speed of the yuan’s recent tumble will slow, and policy makers will step in to squeeze out speculators if bearish bets increase, according to a Bloomberg survey of 21 foreign-exchange traders and analysts this month, with the median forecast seeing the yuan declining to 6.8 per dollar by year-end.
The case for limited depreciation in the yuan has been buttressed by its Oct. 1 entry into the International Monetary Fund’s Special Drawing Rights, which is expected to draw capital inflows. The Chinese currency’s share of global payments surged to 2.03 percent in September, the highest since January, according to data from the Society for Worldwide Interbank Financial Telecommunication. The increase is partly due to China’s capital controls limiting companies’ ability to raise yuan, which resulted in more yuan transactions, said Zhou Hao, an economist at Commerzbank AG in Singapore.