Yuan Forwards Complete Weekly Drop on Weak Economy, Fed Outlook

Yuan forwards had their biggest weekly drop this month on concerns that China’s economy is cooling and inflows will slow after the Federal Reserve said it’s prepared to reduce monetary stimulus.

The People’s Bank of China set the yuan’s reference rate 0.11 percent lower at 6.1766 per dollar today, the most since May 10. Fed Chairman Ben S. Bernanke said on June 19 the central bank could taper its $85 billion of monthly bond purchases this year and end the program in 2014 if the U.S. economy achieves sustainable growth. China reported this week foreign direct investment rose the least in four months, while a gauge of manufacturing signaled a contraction.

“We see risk of the Chinese yuan weakening,” said Jonathan Cavenagh, a strategist at Westpac Banking Corp. in Singapore. “Capital flows will be reversing. Growth momentum is definitely more questionable.”

Twelve-month non-deliverable forwards declined 0.43 percent this week to 6.2957 as of 4:37 p.m. in Hong Kong, according to data compiled by Bloomberg. The contracts rose 0.15 percent today. The discount to the spot rate was 2.6 percent, the deepest since February 2009.

In the onshore spot market in Shanghai, the yuan dropped 0.06 percent in the past five days to 6.1342 per dollar, according to China Foreign Exchange Trade System prices. The rate, which is allowed to diverge from the fixing by a maximum 1 percent, fell 0.10 percent today. The yuan has strengthened 1.6 percent this year, the best performer among Asia’s 11 most-traded currencies, according to data compiled by Bloomberg.

Some ‘Bearishness’

In Hong Kong’s offshore market, the yuan was little changed this week and rose 0.04 percent today to 6.1303 per dollar.

Investors should sell the offshore yuan against the dollar, Westpac’s Cavenagh said, adding that non-deliverable forwards have already priced “a bit of bearishness.”

The Dollar Index, which tracks the greenback against the currencies of six major trading partners, climbed 1.5 percent this week, headed for its biggest gain since the period ended July 6.

China’s economy may slow to 7.4 percent to 7.6 percent this year, Economic Information Daily reported, citing Zhang Ping, deputy head of an economic institute under the Chinese Academy of Social Sciences. Gross domestic product growth last year was 7.8 percent.

The Chinese currency’s appreciation may slow and the yuan could become less of an “anchor” for Asian currencies, Citigroup Inc. analysts led by Johanna Chua wrote in a note to clients.

Inflows Slow

Yuan positions at China’s financial institutions accumulated from sales of foreign exchange, an indication of capital inflows, rose 66.9 billion yuan ($10.9 billion) in May, the central bank reported June 14. That’s the smallest gain since November.

One-month implied volatility, a measure of expected moves in the exchange rate used to price options, increased 15 basis points, or 0.15 percentage point, this week to 1.93 percent. The gauge advanced five basis points today.

Inbound non-financial investment increased 0.3 percent from a year earlier to $9.26 billion, after a 0.4 percent gain in April, the government reported on June 18.

The preliminary reading of 48.3 for a Purchasing Managers Index for June, compares with the 49.1 median forecast in a Bloomberg News survey of 15 economists, HSBC and Markit Economics data showed yesterday. May’s final reading of 49.2 was the first one below 50 since October, indicating a contraction.

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