People’s Bank of China braces for weaker yuan as Fed plans taper

Bloomberg reports that the People’s Bank of China is now dealing with a currency sliding on the prospect of over higher U.S. rates.

The exchange rate plunged the most in nearly three months in offshore markets Wednesday, after the Fed accelerated its expected pace of policy tightening -- a move that would strengthen the dollar. A forum backed by the Chinese central bank released a statement urging corporates to hedge against yuan volatility, right after a state-run paper said the currency could start to decline.

“The Fed will definitely start tapering eventually, so it’s normal that the PBOC and investors are now concerned with yuan depreciation,” said Gao Qi, a currency strategist at Scotiabank in Singapore. “In the short-term, the yuan could rebound as the market has overreacted to news on tapering. But still, bets on tighter U.S. policy should have dampened confidence in the yuan, which will drop every time there’s news on the Fed being hawkish in the second half.”

The PBOC has always been cautious about yuan volatility in either direction, as it strives to keep financial markets steady to avoid risks. Rapid depreciation raises risks of fast capital outflows, hurting China’s push for the global use of its currency.