Forwards traders are stepping up bets that China will let the yuan weaken in 2016, after the IMF decides on the currency’s eligibility for reserve status.
Speculation that the People’s Bank of China will allow greater volatility after the International Monetary Fund meeting in November is spurring bearish bets on contracts longer than six months, said Dennis Tan, a foreign-exchange strategist at Barclays Plc in Singapore. The attached chart shows 12-month non-deliverable contracts dropping 0.4 percent so far in July, while the one-month are little changed.
The yuan has held within 0.4 percent of 6.2 a dollar since the end of March, a level seen as a de-facto peg by National Australia Bank Ltd., as China pushes its case for IMF inclusion. The PBOC has strengthened its daily fixing, which restricts the onshore currency’s moves to 2 percent, by 0.4 percent since April. The Shanghai Composite Index of equities has tumbled 28 percent from a peak in June, overriding support steps including a suspension of initial public offerings.
“Investors are concerned that the yuan will be more volatile and face downward pressures without the PBOC’s support after the review,” said Tan. “The plunge in mainland equities hurts sentiment and has spillover effects on other asset classes.”
Twelve-month non-deliverable forwards on the yuan rose Thursday as Chinese stocks rallied. The contracts climbed 0.1 percent to 6.2725 a dollar as of 4:56 p.m. in Hong Kong, data compiled by Bloomberg show. The one-month tenor was steady at 6.1249.
The offshore yuan, which trades freely in Hong Kong, was little changed at 6.2168 a dollar, data compiled by Bloomberg show. The onshore rate, which is constrained by a daily central bank fixing, closed steady at 6.2088 in Shanghai, according to China Foreign Exchange Trade System prices. The gap between the onshore spot rate and the PBOC fixing of 6.1151 was 1.5 percent, within the 2 percent limit.
Overseas investors sold 3.5 billion yuan ($564 million) more Shanghai stocks than they bought on Thursday via a link with Hong Kong, a fourth straight day of net sales.
Eleven out of 16 economists surveyed by Bloomberg in the June 18-24 period predicted the IMF will add the yuan to its Special Drawing Rights basket in 2015. The Washington-based institution rejected the currency in 2010 on the grounds it was not “freely usable.”
For more, read this QuickTake: The People's Currency
— With assistance by Tian Chen