TOKYO -- The yuan faces further downward pressure for the short term with the move by the Chinese central bank to widen the currency's trading band against the dollar for the first time in two years.
The Chinese currency lost ground Monday, with the greenback gaining 0.0279 yuan to end at 6.1781 in Chinese trading.
The yuan's depreciation was triggered after the People's Bank of China decided to expand its trading band for the currency exchange rate, which took effect Monday. The exchange rate can now rise or fall 2% from the daily rate set by the central bank instead of the previous 1%. Market observers believe that China aims to curb inflows of speculative money while giving exports a boost.
"It's a message from Chinese authorities that there will not be a unilateral rise in the yuan," says Minori Uchida, chief analyst at Bank of Tokyo-Mitsubishi UFJ.
The wider trading band can serve as a bearish and bullish incentive for the yuan. But Masafumi Yamamoto, market strategist at Praevidentia Strategy, argues that "the Chinese central bank targeted the band expansion when a weakened yuan was already anticipated."
The People's Bank of China is believed to have conducted a massive yuan-selling intervention at the end of last month to weaken the currency. Concern about the Ukraine crisis has also spurred selling of the yuan, viewed as a risk asset.
Speculation that the Chinese central bank seeks a weaker home currency is supported in part by the nation's slowing exports. The value of exports plunged 18.1% on the year in February, the first decline in five months, according to trade data. Market observers believe that the country welcomes a weaker currency as an economic stimulus measure to lift exports.
Some also reckon that efforts to promote a weaker yuan are aimed at limiting inflows of speculative funds. "At the very least, China wants to avoid a strong yuan that may lead to heavy inflows from speculative money through May and June, when many financing products are scheduled for redemption," says Nobuo Ichikawa, group manager at Mitsubishi UFJ Trust and Banking.
For now, the Chinese currency's downside will likely be "6.20 to 6.25 yuan to the dollar," according to a currency official at a major bank. With China enjoying a steady current-account surplus, the yuan may face mild appreciation pressure over the medium to long term, other observers say.
After redemptions of financing products peak in June and beyond, the Chinese central bank's concerns about a strong yuan may subside and the currency could inch up.