Yuan Forwards Weaken on Investment Flow Concern, Export Outlook

Aug. 14 (Bloomberg) -- Yuan forwards weakened before data that is forecast to show investment inflows into China fell for a second month in July as a global economic slowdown weighed on exports.

Foreign direct investment probably fell 2.5 percent from a year earlier after a 6.9 percent drop in June, economists estimated in a Bloomberg survey. The figures may be released as soon as today, said Dariusz Kowalczyk, a strategist at Credit Agricole CIB in Hong Kong. Data today showed the euro area’s gross domestic product contracted in July as expected, while a separate report later may show American retail sales rebounded. Europe and the U.S. are the top destinations for Chinese exports, which grew the least in six months in July.

“China’s export outlook remains very uncertain with Europe yet to show any signs of recovery,” said Kenix Lai, a Hong Kong-based currency analyst at Bank of East Asia Ltd. “The yuan will likely trade weaker against the dollar as capital inflows are slowing.”

Twelve-month non-deliverable forwards fell 0.03 percent to 6.4255 per dollar as of 4:57 p.m. in Hong Kong, data compiled by Bloomberg showed. The contracts traded at a 1 percent discount to the spot rate, which gained 0.05 percent to close at 6.3586 in Shanghai.

In Hong Kong’s offshore market, the yuan gained 0.02 percent to 6.3640. One-month implied volatility, a measure of exchange-rate swings used to price options, declined five basis points, or 0.05 percentage point, to 1.25 percent.

Forex Positions

Yuan positions at Chinese lenders accumulated from sales of foreign exchange to the central bank fell 3.8 billion yuan ($598 million) from a month earlier to 25.658 trillion yuan as of the end of July, the People’s Bank of China said today. This suggests the PBOC may have intervened to support the currency last month, Credit Agricole’s Kowalczyk said.

Still, “it will be difficult for the yuan to turn around until Chinese corporates regain confidence in the outlook of their own currency,” he said.

China is devising rules to help foreign companies invest in the nation’s strategic emerging industries, Economic Information Daily reported today, citing an unidentified official. Overseas sales climbed 1 percent in July from a year earlier, after an 11.3 percent increase in June, data showed last week.

The People’s Bank of China set the yuan’s reference rate 0.02 percent stronger at 6.3443 per dollar today, raising it for the first time in five days. The currency is allowed to trade as much as 1 percent on either side of the central bank’s daily reference rate.

To contact the reporter on this story: Fion Li in Hong Kong at fli59@bloomberg.net

To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net