Yuan Pares Biggest Monthly Decline Since May as Greenback Drops

(Bloomberg) -- China's yuan advanced, paring its biggest monthly loss since May, as a gauge of dollar strength declined.

The currency traded in Shanghai's spot market climbed 0.13 percent to 6.7720 a dollar as of 5:28 p.m local time, trimming its retreat for October to 1.4 percent. The offshore rate is down 1.6 percent for the month. The Chinese currency has been moving in tandem with the dollar, which slumped Friday after the Federal Bureau of Investigation said it is reopening an inquiry into Hillary Clinton's use of private e-mail while she was secretary of state.

“It's all accredited to the dollar rather than from the China side of things,” said Peter Chia, a foreign-exchange strategist at United Overseas Bank Ltd. in Singapore. “We see the yuan at 6.8 will be heavily scrutinized and I would say that the authorities will take a closer look then. The new line in the sand will be around 6.8 to 6.83.”

The yuan's declines come at a time of increased pressure on policy makers to help boost exports, which tumbled the most in seven months in September. The currency has slumped 6.7 percent against a trade-weighted index this year, outstripping its 4.1 drop against the dollar. While the Chinese currency's asymmetrical moves -- weakening when the dollar climbs, but not commensurately rising when the greenback drops -- have eased, signs still indicate a bias for depreciation, according to a Goldman Sachs Group Inc. note dated Oct. 28.

Policy makers are taking steps to control one-way bets, with officials including People's Bank of China Deputy Governor Yi Gang and research bureau chief Ma Jun talking up the exchange rate and the central bank on Monday strengthening its fixing by the most in more than a month. China UnionPay Co. said the use of its credit and debit cards to buy insurance products in Hong Kong will be suspended other than for accident and medical coverage.

"These are small steps that they're taking to signal to the bigger public that they are keeping tabs on all avenues of outflows, and they're very keen to do that,” said Chia. “In the short term, we may not see the impact on how it will limit outflows but the scrutiny is definitely there for China."

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.

In a sign that the PBOC may have intervened to prop up the yuan last month, the central bank said Monday that its short foreign-currency positions in forwards and futures climbed to $45.3 billion in September. That's up from August's $28.9 billion, a level where the positions have remained at since the monetary authority first started reporting the data with February's figures. The PBOC statement Monday said that $16.4 billion of the short positions mainly reflect forward operations with commercial banks to meet demand for hedging.

--With assistance from Justina Lee and Stephen Tan To contact Bloomberg News staff for this story: 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 Helen Sun