Yuan in Biggest Three-Day Rally Since September as Dollar Drops

(Bloomberg) -- China's yuan headed for its biggest three-day gain in two months as the dollar weakened amid growing market volatility ahead of next week's U.S. presidential election.

The exchange rate climbed 0.09 percent to 6.7620 a dollar as of 5 p.m. in Shanghai, extended a three-day advance to 0.28 percent. The Chinese currency has been closely tracking the dollar since the yuan entered the International Monetary Fund's reserves basket on Oct. 1, with the People's Bank of China seen pulling back on efforts to prop up the yuan when the greenback advances.

The yuan's dollar-driven gain was among the few spots of strength in emerging markets, with a measure of developing-nation currencies dropping for a second day. A gauge of the U.S. currency's strength slipped to a one-week low overnight as an ABC News/Washington Post poll placed Republican nominee candidate Donald Trump one percentage point ahead of Democratic rival Hillary Clinton. The Federal Reserve reviews monetary policy Wednesday, with some analysts saying a Trump victory could reduce odds of a December rate increase.

“The market focus is now on the dollar - how it'll be affected by the U.S. elections and the Fed,” said Banny Lam, head of research at CEB International Investment Ltd. in Hong Kong. “The yuan is taking a breather on the dollar weakness of the past couple of days, but looking forward, local residents' demand for overseas assets to hedge against the currency's losses may continue to pressure the yuan.”

Alternative Assets

This week's gains aside, the yuan's 4 percent decline this year has made it the biggest loser among 11 Asian exchange rates tracked by Bloomberg. The weakness has prompted some Chinese investors to move into dollar-linked assets, according to a Goldman Sachs Group Inc. report that cited an iron-ore rally as an example. Cryptocurrency Bitcoin has also seen a surge of late, advancing the most since June last week, while gold's yuan premium widened last month.

Policy makers -- walking a thin line between allowing yuan weakness to help bolster exports and limiting declines to avoid risks to the financial system - have taken several steps to curb one-way bets. China UnionPay Co. has restricted use of its credit and debit cards to buy insurance products in Hong Kong -- where the local currency is linked to the U.S. dollar -- while PBOC Deputy Governor Pan Gongsheng said recently that there is no basis for continued yuan depreciation.

"The reason why a lot of Chinese are buying insurance products and Hong Kong real estate is because of the Hong Kong dollar's peg to the greenback,” said CEB International's Lam. “They think it's convenient and a good hedge. If the Fed raises interest rates, the yuan will continue to be under pressure."

In the U.S., odds of a win for Clinton have fallen to 71.8 percent, according to poll aggregator FiveThirtyEight, from 81.6 percent last week. A Bank of America Corp. index tracking volatility expectations in equities, bonds, currencies and commodities rose for five straight days through Monday, the longest run of increases since before Britain's June vote to quit the European Union.

In China's money markets, the central bank drained funds in open-market operations for the first time in 11 days, pulling 35 billion yuan ($5.2 billion), data compiled by Bloomberg show.

The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven day repo rate, fell three basis points to 2.70 percent after retreating by the most in more than three months on Tuesday. The yield on 10-year sovereign notes was unchanged at 2.74 percent, according to National Interbank Funding Center prices. The seven-day repurchase rate plunged 13 basis points to 2.37 percent.

“The accumulated injections from the central bank finally started to take effect,” said Hong Ben, an analyst at Yinzhou Bank in Ningbo city, Zhejiang province. “However, there's no doubt that interbank liquidity will be relatively tight before the year-end.”

In Taiwan, the 10-year government bond yield fell five basis points, the most since Jan. 30, to 0.91 percent, Taipei Exchange prices show. The yield climbed 28 basis points in October, the biggest monthly rise since 2006. Wednesday's drop comes after the central bank cut the rate on overnight certificates of deposit by 0.2 basis points to 0.172 percent, according to people familiar with the matter. The Taiwan dollar was little changed at NT$31.56 against the greenback.

--With assistance from Tian Chen To contact Bloomberg News staff for this story: Robin Ganguly in Hong Kong at rganguly1@bloomberg.net, Helen Sun in Shanghai at hsun30@bloomberg.net. To contact the editors responsible for this story: Richard Frost at rfrost4@bloomberg.net, Robin Ganguly

With assistance from Robin Ganguly, Helen Sun