Offshore Yuan Near Two-Month Low on Dollar Rally, Growth Concern

The yuan traded in Hong Kong’s overseas market traded near a two-month low amid depreciation concerns as the world’s second-largest economy showed signs of a slowdown and the dollar rallied.

The offshore exchange rate’s discount to the price in Shanghai expanded to the widest in three months this week, suggesting sentiment toward the yuan is sliding among global investors. A gauge of the greenback rose 0.5 percent from May 6, extending this month’s advance to 1.9 percent, after four regional Federal Reserve presidents indicated the possibility of an interest-rate increase next month.

The offshore yuan rose 0.04 percent to 6.5457 a dollar on Friday, paring losses for the week to 0.4 percent as of 6:46 p.m. in Hong Kong, according to data compiled by Bloomberg. It earlier fell to 6.5548, the lowest level since March 2. The onshore currency in Shanghai dropped 0.11 percent for the day and 0.48 percent from May 6, leaving the gap between the two rates at 0.4 percent. The spread was 0.6 percent on Wednesday, the widest since February.

"The market is getting pessimistic about the yuan, as recent data suggest that the economy slowed in April and the dollar resumed strength," said Banny Lam, Hong Kong-based co-head of research at Agricultural Bank of China International Securities. "The drops in the Hong Kong and Shanghai stock markets have also had spillover effects on the currency. The possibility for a yuan rebound in the next two weeks is very low, because we need very good data to help improve sentiment."

China’s benchmark Shanghai Composite Index declined for a fourth straight weekly decline, while Hong Kong’s Hang Seng Index fell to a two-month low. China’s industrial production probably fell to 6.5 percent in April from 6.8 percent in March, according to data scheduled to be released on Saturday. Figures earlier this month showed a slowdown in exports as well as manufacturing.

The People’s Bank of China cut the yuan’s daily reference rate by 0.44 percent on Friday to 6.5246 a dollar, the lowest since March 4. A Bloomberg replica of the CFETS RMB Index, which the central bank uses to track the yuan against 13 currencies, dropped for the first time in eight days to 96.98.

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, Robin Ganguly, Allen Wan