Yuan in Longest Weekly Rally Since 2014 as China Raises Rhetoric

Why Re-Pegging the Yuan May Be China's Best Option
  • Nation has signaled it doesn't want fast decline: Commerzbank
  • State media step up support even as bears signal return

The yuan recorded the longest stretch of weekly gains since October 2014, with China’s authorities intensifying verbal support and tightening capital controls.

Yuan bears who foresee a hard landing are either being selectively blind or are jealous, the official People’s Daily newspaper wrote in a commentary on Wednesday. Speculators who are betting against the currency “haven’t done their homework,” the state-run Xinhua News Agency said last week, adding that they may be trying to create panic to profit from the turmoil.

The yuan rose 0.1 percent from Jan. 29 to 6.5698 a dollar as of 5 p.m. in Shanghai on Friday, extending its advance for the past four weeks to 0.4 percent, according to China Foreign Exchange Trade System prices. The currency fell 0.08 percent for the day. The offshore exchange rate strengthened 0.24 percent for the week to 6.5781. Local financial markets will be closed next week for the Lunar New Year holiday.

“China has signaled that it doesn’t want to see a faster depreciation of the yuan but the market is still uncertain about this because growth concerns remain,” said Zhou Hao, an economist at Commerzbank AG in Singapore.

Gap Widens

The official Chinese media’s defense of the nation’s currency and economic policies followed an eight-day run of reductions to the yuan’s reference rate that extended into earlier this year and spurred depreciation bets. The offshore yuan’s discount to the onshore rate widened on Wednesday to the most in three weeks, signaling that international investors are reviving bets against the currency.

Hedge fund bets against the currency have become so numerous, according to Bill Gross of Janus Capital, that he compared the wagers in a Twitter post to the speculative attack on Britain’s pound in 1992.

The People’s Bank of China strengthened its fixing, which limits onshore moves to 2 percent on either side, by 0.16 percent to 6.5314 a dollar on Friday. That takes its two-day advance to 0.32 percent, the most since November.

Authorities can keep the exchange rate basically stable against a basket of currencies because the nation has ample foreign-exchange reserves and a solid financial system, CFETS said in a statement posted on its website this week. The currency stockpile is poised to post a second consecutive record monthly drop for January as policy makers intervened to support the yuan, according to the median estimate in a Bloomberg survey of economists before data due on Sunday.

“China is in danger of slipping below the adequate range if it tries to defend a fixed exchange rate, with leaky capital controls,” Royal Bank of Canada strategists including Elsa Lignos wrote in a note, referring to China’s foreign-currency hoard. “It has to either tighten capital controls or move to a more freely floating currency. While market expectations build for a one-off devaluation, we think a slow depreciation is much more likely.”

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