Yuan Slumps Most in a Month as Depreciation Pressures Intensify

(Bloomberg) -- The yuan dropped the most in a month after the central bank weakened the currency's reference rate and the greenback rebounded.

The onshore exchange rate declined 0.33 percent to 6.7764 a dollar as of 6:14 p.m. local time, its biggest drop since Oct. 10, and fell to a record low against a basket of peers. While a slump in the U.S. currency last week gave the yuan a temporary reprieve, data released Monday showed China's foreign-exchange reserves dropped last month by the most since January as depreciation pressures increased.

Declines in the yuan have accelerated since the currency was included in the International Monetary Fund's reserves on Oct. 1 and increasing bets for higher U.S. interest rates bolstered the dollar. China's reserves dropped last month by $45.7 billion to $3.12 trillion, the lowest level since 2011, the central bank said.

"The yuan will drop against the dollar and a basket of currencies in the coming days, as the PBOC has been engineering the depreciation to preempt any sharp spikes after the U.S. election or a Federal Reserve rate hike," said Iris Pang, senior economist for Greater China at Natixis SA in Hong Kong. Policy makers "can control the pace of depreciation with stronger fixings and direct intervention if there are any signs of stress."

The Bloomberg replica of the CFETS RMB Index, which tracks the yuan against 13 exchange rates, dropped for a fifth day to 93.74. That's the lowest since the gauge was introduced in December. The People's Bank of China cut the yuan's daily reference rate by 0.31 percent, the most since Oct. 21. The offshore rate dropped 0.2 percent in a third day of losses.

A gauge of the dollar's strength gained for the first time in seven days, after the FBI said it stuck by an earlier finding that Hillary Clinton didn't commit a crime in her handling of e-mails as secretary of state. U.S. employment data on Friday bolstered the case for higher borrowing costs and Federal Reserve Bank of Atlanta President Dennis Lockhart signaled a December rate hike was likely.

China's monetary authority was speculated to be propping up the yuan during the run-up to a Group of 20 meeting in September and IMF inclusion before allowing declines to continue. The currency has now fallen more than 6 percent in the past 12 months, the most in Asia.

"The yuan was sprinting all the way to approach 6.8 per dollar in October, which may have prompted the PBOC to sell some reserves to stabilize the market," said Gao Qi, a Singapore-based foreign-exchange strategist at Scotiabank. "Capital outflows will continue, the only question is how fast, and that depends on the dollar's move."

The central bank drained a net 140 billion yuan ($20.7 billion) in open-market operations on Monday, the most in three weeks, data compiled by Bloomberg show. The monetary authority has stepped in to pull funds from the financial system since offering 437 billion yuan of loans to lenders via Medium-term Lending Facility on Nov 3.

The overnight repurchase rate, a gauge of interbank funding availability, fell for a sixth day, the longest losing streak since January. The rate fell one basis point to 2.09 percent Monday, weighted average prices show. The yield on government notes due in a decade rose four basis points to 2.77 percent, according to National Interbank Funding Center prices.

--With assistance from Helen Sun To contact Bloomberg News staff for this story: Tian Chen in Beijing at tchen259@bloomberg.net. To contact the editors responsible for this story: Richard Frost at rfrost4@bloomberg.net, Philip Glamann

With assistance from Tian Chen