Yuan Edges Lower as PBOC Reports Higher FOREX Sales

• PBOC release strengthens theory of capital outflows

The Chinese yuan fell sharply on Monday, as the central bank reported surprisingly large foreign exchange sales in July, the concerns generated by this report was further intensified by an already apparent fear that the Chinese economy is experiencing significant spates of capital outflows. The People’s Bank of China (PBOC) in July reportedly sold a net 190.5 billion Chinese yuan ($28.7 billion) worth of foreign exchange according to Reuters estimations based on the central bank data that dropped on Sunday, this is the largest increase since March.

“Commercial banks sold a net $31.7 billion worth of foreign exchange in July, up from $12.8 billion in June”, the State Administration of Foreign Exchange (SAFE) said in a statement on its website, the SAFE also added that, “net forex sales totalled $205.5 billion in the first seven months of this year”

The Chinese yuan was seen to have gained against the dollar in the second half of July, after previously falling swiftly in June and early July in the wake of the UK referendum’s surprising outcome as a need for safe haven assets was raised. The strengthening of the yuan has been seen by analysts as the Central Bank’s determination to throw off revived hopes of a sharp decline in the currency this summer.

However, a recent Reuters poll revealed that analysts anticipated a drop of over 3% for the yuan against the dollar by a year from now, more than expected a month ago, in view that the economy struggles to maintain its momentum and the dollar climbs higher on speculations of an eventual U.S. rate rise.

The PBOC who have earlier adopted a more transparent method of midpoint fixing set the midpoint rate at 6.6543 to a dollar which is stronger than the previous fix at 6.6543, the fix was set just before the market opened. The yuan opened on the spot market at 6.6438 against the dollar and was trading at 6.65475 by noon, about 146 pips from the previous late session close and 0.07% lower than the midpoint.

The yuan’s spot rate is currently allowed to trade at a range of 2% above or below the official midpoint fixed on any trading day. Investors believe that the swift slide seen on Monday did not come as a huge surprise due to the result of the foreign exchange sales data released over the weekend.

"The data release was a factor today, but broadly I think we can expect the yuan to stay range bound for now," said a trader at a commercial bank in Shanghai yesterday. "With the G20 coming up in Hangzhou, the central bank won't want to see a lot of volatility."

According to the Thomson Reuters/HKEX Global Index, a tool meant to track the offshore yuan against a group of major currencies on a daily basis, the yuan is holding a stronger reading at 95.1 against last Friday’s close of 95.2.