Yuan forwards are trading at the biggest discount to the spot rate in four years on bets a three-month appreciation in China’s currency will reverse following next week’s U.S. elections.
One-month contracts traded at a 0.92 percent discount today and a 0.98 percent gap last week was the biggest since December 2008, according to data compiled by Bloomberg. The currency gained 2 percent in the August-October period and a weakening may cool global demand for yuan-denominated debt. The average yield on Dim Sum bonds in Hong Kong fell 40 basis points to 4.92 percent since July, a Bank of China Ltd. index shows.
U.S. presidential candidates Barack Obama and Mitt Romney both say an undervalued yuan gives China an unfair edge in trade, with the latter having threatened to label the nation a “currency manipulator.” The yuan is forecast to depreciate 0.9 percent to 6.3 against the greenback by the end of this year as the currencies of Brazil, India and Russia strengthen, according to the median estimates of analysts surveyed by Bloomberg.
“The yuan is likely to retreat once the U.S. election is over as political pressure for appreciation will abate,” Kenix Lai, a foreign-exchange analyst at Bank of East Asia Ltd. in Hong Kong, said in a phone interview yesterday. “Focus will then return to China’s economic fundamentals. A tough exports outlook isn’t supportive of a strong exchange rate.”
One-month non-deliverable forwards for the yuan fell 0.1 percent to 6.3008 per dollar yesterday in Hong Kong, after advancing 0.71 percent in October, according to data compiled by Bloomberg. The contracts, which are little changed today and settled in dollars, allow investors to buy or sell the currency at a set price on a specified date. The yuan fell 0.03 percent to 6.2426 today in Shanghai, following an October gain of 0.76 percent.
The Brazilian real will advance 1 percent by the end of this year, India’s rupee will gain 0.8 percent and Russia’s ruble will appreciate 0.9 percent, based on the median estimates in Bloomberg surveys.
The yuan’s recent gains were linked to the U.S. elections and China’s economic data for September, China Securities Journal reported Oct. 29, citing Chen Daofu, a researcher at the State Council’s Development Research Center. Continued appreciation is unlikely unless the government announces large-scale stimulus, the paper quoted Chen as saying.
Obama and Romney criticized China’s exchange-rate policy while campaigning ahead of the Nov. 6 election, saying an undervalued yuan gives Chinese exporters an unfair advantage. The U.S. trade deficit in goods with the Asian nation reached a record $295.4 billion in 2011, an 8 percent increase from 2010.
“On day one, I will label them a currency manipulator, which allows us to apply tariffs where they’re taking jobs,” Romney said during the Oct. 22 debate with Obama. The U.S. Treasury’s latest report on exchange-rate policies, issued May 25, said there is evidence the yuan “remains significantly undervalued” and further appreciation is warranted.
“The yuan’s fixing has the potential to strengthen going into U.S. elections,” Dariusz Kowalczyk, a Hong Kong-based strategist at Credit Agricole CIB, wrote in an Oct. 29 research note. “We continue to see a correction post-U.S. elections to 6.3 by year-end.”
The People’s Bank of China sets a daily reference rate on either side of which the yuan spot in Shanghai can trade as much as 1 percent. The central bank today lowered the fixing to 6.3045 per dollar, 1.02 percent below the previous closing level, meaning the currency had to weaken to remain within its permitted trading range.
“We see signs that the PBOC is managing the exchange rate fixing within a narrow range around 6.3,” Tao Wang, the Hong Kong-based head of China economic research at UBS AG, wrote in an e-mailed reply to Bloomberg News yesterday. “We don’t think the PBOC will favor a much stronger yuan as it’s no longer much undervalued, export growth is weak and growth has slowed.”
She predicts the currency will trade in a range of 6.2 to 6.4 versus the dollar in the next 12 months, saying “steady and predictable yuan appreciation has ended.” China’s overseas sales increased 7.4 percent in the first nine months of this year, after climbing 20 percent in 2011 and 31 percent in 2010, and the economy expanded in the third quarter at the slowest pace since March 2009.
A once-a-decade leadership transition in China, which will start on Nov. 8, is fueling bets for more stimulus in the world’s second-largest economy. An official Purchasing Managers’ Index was 50.2 in October, suggesting manufacturing expanded for the first time in three months, data showed yesterday.
Five-year credit-default swaps protecting China’s sovereign debt dropped 21 basis points to 67.8 in October in New York, the lowest level since January 2011, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent if a government or company fails to adhere to its debt agreements.
“I see the data continues to be mixed,” Endre Pedersen, managing director for Asian fixed income in Singapore at Manulife Asset Management, said in an interview on Oct. 30. “People are focused on what the new administration will be able to do. It’s still very early days but markets move ahead of numbers, ahead of news.”
Manulife will “continue to sit on” the $2 billion worth of yuan-denominated assets it manages, Pedersen said, adding that China’s currency is likely to keep appreciating over the next three to five years.
‘In The Price’
Besides optimism on China’s growth outlook, the yuan also gained on a weakened view on the dollar since the Federal Reserve unveiled a third round of quantitative easing on Sept. 13, Linan Liu, rates strategist for greater China at Deutsche Bank AG in Hong Kong wrote in an e-mailed reply to Bloomberg News on Oct. 31. Yet Liu said she still expects the yuan to retreat to 6.3 per dollar by year-end.
One-month implied volatility in the yuan, a measure of exchange-rate swings used to price options, had risen to 1.6 percent yesterday from a two-year low of 1.05 percent on Oct. 5. The yield on benchmark 10-year government bonds has climbed 11 basis points to 3.60 percent since the end of September, according to Chinabond data.
“I believe that some of the good news is already in the price,” Paul Mackel, a Hong Kong-based head of Asian currency research at HSBC Holdings Plc, wrote in an e-mailed reply to Bloomberg on Oct. 31, predicting the yuan will reach 6.3 per dollar by year-end.
“Despite some brighter signs for the economy, it will be harder for the yuan to keep strengthening at the pace,” Mackel said. “And I’d expect those that trade onshore will look for better levels to re-sell spot.”