CHINA’S central bank set the yuan midpoint at 6.9262 per U.S. dollar yesterday in its biggest daily drop in percentage terms in more than six months after a wild ride last week that saw the yuan strengthen by around 1 percent before falling back.

    The fix was 594 pips, or 0.86 percent, weaker than the mid-point rate Friday, which was 6.8668 per dollar.

    Yesterday’s official fixing came in at a much firmer level than the market had expected, traders said, with forecasts around 6.9450 per dollar.

    Last week, yuan overnight interbank rates in Hong Kong soared pushing the offshore version of the currency, the CNH, to its strongest levels since last January and creating a knock-on effect on the onshore yuan.

    China’s foreign exchange reserves fell to near six-year lows by the end of last month but held just above the critical US$3 trillion level, the government reported Saturday, after authorities stepped in to support the weakening yuan ahead of U.S. President-elect Donald Trump’s inauguration.

    “The spike of [the] fixing this morning together with the fall of December forex reserves to US$3.01 trillion implies that expectations on yuan depreciation may resume this week,” Tommy Xie, an economist at OCBC Bank in Singapore wrote in a note yesterday.

    Some traders said the stronger-than-expected mid-point may have been a result of the mechanism, which eliminates some of the highest and lowest quotes from contributors.

    Weakness in the yuan yesterday also reflected strength in the greenback, which was boosted by a solid U.S. jobs report Friday that analysts said bolster the case for further interest rate increases from the Federal Reserve this year.

    The latest China Foreign Exchange Trade System (CFETS) data showed that the index for the yuan’s value based on the market’s trade-weighted basket stood at a new high of 95.25 Friday, the highest level since July 2016. The previous mark was 94.83, released Dec. 30.

    Dealers in international currencies were keeping a wary eye on the yuan after China engineered a sharp tightening in liquidity last week that squeezed speculators out of short yuan/long U.S. dollar positions.

    Yet the defence of the yuan is proving expensive. Figures out over the weekend showed China’s foreign exchange reserves fell to nearly six-year lows in December as the government fought to stem an outflow of capital that could ultimately force another devaluation of the currency.

    The Economic Information Daily yesterday reported that Yu Yongding, a former member of the central bank’s Monetary Policy Committee, said the pressure from outflows will persist this year and China cannot let its yuan currency depreciate more than 25 percent against the dollar in 2017.

    The yuan depreciated 6.6 percent against the surging dollar in 2016, its biggest one-year loss since 1994.

    (SD-Agencies)