Yuan set for longest losing run since June

China's yuan weakened for an eighth day, the longest run of losses since June, on increased capital outflows and speculation that the central bank is guiding the currency lower to help an economy growing at the slowest pace in 25 years.

The People's Bank of China (PBOC) cut the yuan's reference rate for the seventh day in a row after a barometer of capital flows posted the second-biggest drop on record. This followed the authority's move on Friday to play down the currency's recent losses by saying its performance shouldn't be measured against the dollar alone. While the PBOC was seen propping up its exchange rate in the past few months, it has allowed declines on all but one day since winning International Monetary Fund reserve status on November 30.

The China Foreign Exchange Trade System, which is run by the PBOC to facilitate interbank trading, published a new yuan index composed of 13 currencies, a development seen as setting the stage for a further decline against the dollar. "Investors are taking cues from the fixings and the focus on a basket of currencies as signs that China is anchoring a weaker yuan," said Stella Lee, president of Success Wealth Management Ltd in Hong Kong. "We are in a tricky vicious cycle as yuan depreciation spurs capital outflows," which in turn fuel bearish bets on the currency, she said.

Yuan Drops

The yuan fell 0.08 per cent to 6.4641 a dollar as of 2:10 pm in Shanghai, taking its eight-day decline to one per cent, according to CFETS prices. The PBOC lowered its daily fixing, which restricts onshore yuan moves to two per cent on either side, by 0.1 per cent to a four-year low of 6.4559. The currency will depreciate to about 6.55 by the end of 2016, ABN Amro NV forecast in a research note on Tuesday.

In Hong Kong's offshore market, the yuan rose 0.21 per cent to 6.5409 a dollar, halting a six-day drop of 1.7 per cent, according to data compiled by Bloomberg. The currency's 14-day relative strength index increased to 80 on Monday, above the level of 70 that indicates to some traders that it's oversold.

'Christmas Surprise'

A rebound in the offshore yuan accompanied by a spike in funding costs may be a "Christmas surprise" as dollar gains slow after the Federal Reserve meets this week, Morgan Stanley strategists led by Kewei Yang wrote in a note on Tuesday. The current market position is very one-sided in shorting the offshore yuan and liquidity will be thinner around the holidays, they said.

The yuan and other Asian currencies are facing depreciation pressure with the Fed widely forecast to raise interest rates for the first time since 2006, a move that could spur emerging-market outflows. There's a 76 per cent chance the US central bank will tighten policy at the December 15-16 meeting, futures contracts show.

Yuan positions on the PBOC's balance sheet fell by 315.8 billion yuan ($49 billion) in November, a report showed on Monday. That was the most in data going back to 1993 after a 318.4 billion yuan outflow in August, when the central bank's devaluation of the currency spurred the biggest monthly tumble in two decades.

While the economy is forecast to expand 6.9 per cent this year, the slowest pace since 1990, recent data suggest an improvement. Bloomberg's monthly tracker of China's gross domestic product climbed to 6.85 per cent in November, the best reading since June, after retail sales and factory output data beat analysts' estimates.