China’s Yuan Fixings Shift Seen as a Boon for Bulls

The most reliable emerging-market currency bet of the past nine years is making a comeback on signs China is finished engineering the sharpest-ever decline in the yuan.

The People’s Bank of China strengthened the reference rate for the yuan by 0.2 percent last week in its biggest increase this year, after a record five straight months where it weakened the rate. JPMorgan Chase & Co. said that marked a “significant change in behavior” on the part of the central bank and investors should maintain bets on the currency using three-month non-deliverable forwards. Credit Suisse Group AG and Credit Agricole SA also recommended buying the yuan offshore.

“The worst for the yuan is probably over,” Ken Hu, the chief investment officer for Asia-Pacific fixed income at Invesco Asset Management, said in a June 13 interview. “The PBOC was weakening the yuan to shake out those one-way appreciation bets. Now we see an early sign that the renminbi is back to its structural appreciation trend.”

Hu, who is based in Hong Kong and whose firm oversees $787 billion globally, was using another name for China’s currency.

Speculation is building that it’s back to business as usual for the yuan after policy makers depreciated the currency by 3 percent this year to discourage wagers the currency was virtually guaranteed to rise. Renewed gains may curb criticism of the exchange rate before Chinese and U.S. leaders meet for talks in Beijing next month. China’s trade surplus climbed to a five-year high in May and some American lawmakers say an undervalued yuan gives Chinese exporters an unfair advantage.

Renewed Gains

The onshore rate for the yuan climbed to as high as 6.2018 per dollar on June 13, the strongest level since April 10 and up from an 18-month low of 6.2676 on April 30. It gained 0.6 percent last week, the most since 2011, before falling 0.26 percent in the past two days to close at 6.2269 in Shanghai. The yuan’s offshore rate advanced 0.5 percent last week in Hong Kong and was at 6.2340 today.

Credit Agricole forecast the yuan will climb toward 6.17 in coming weeks and JPMorgan predicted it will resume its appreciation in the third quarter and rise to 6.15 by year-end.

“If you have a six-month or longer horizon, you can buy here and benefit from a slightly appreciating currency,” Bert Gochet, JPMorgan’s head of Asia emerging-markets strategy in Hong Kong, said by e-mail on June 12. The U.S. bank published a report on June 11 saying investors should maintain bets on yuan gains using non-deliverable forwards.

Daily Fixing

The yuan is allowed to trade up to 2 percent above or below its daily fixing, or reference rate. The PBOC strengthened the rate to 6.1451 per dollar on June 10, up from 6.1708 on June 5, and it has since been trimmed to 6.1529 today.

Until central bankers started weakening the reference rate in January, the currency gained in all but one of the nine years since a dollar peg ended in 2005. That’s the most consistent run of annual advances among 24 emerging-market currencies tracked by Bloomberg.

This reliability was twinned with the lowest volatility among the currencies after the Hong Kong dollar, making it less risky to hold. At the end of 2013, six-month realized volatility on the yuan was 0.8 percent, compared with 4.6 percent for the Singapore dollar and 15 percent for Indonesia’s rupiah.

The PBOC has raised the reference rate “to deflect criticism of China being a currency manipulator” at annual talks with the U.S. in Beijing early next month, Claudio Piron in Singapore and Hong Kong-based Albert Leung, strategists at Bank of America Corp., wrote in a June 12 note.

Fragile Economy

While there may be gains before the talks, the economy is too fragile for Chinese policy makers to back a sustained rally, according to Barclays Plc, which last week lowered its six-month forecast for the yuan to 6.2 per dollar, from 6.08.

China’s gross domestic product will grow 7.3 percent this year, the least since 1990, economists surveyed by Bloomberg predict. Home prices fell in May for the first time on a monthly basis since June 2012, according to SouFun Holdings Ltd., China’s biggest real-estate website owner.

“The potential for a disorderly decline in house prices, with a negative impact on growth, is likely to keep sentiment subdued and limit the pace of yuan appreciation,” Hamish Pepper, a Singapore-based strategist at Barclays, wrote in a June 10 report.

The median of 39 estimates in a Bloomberg survey predicts an advance to 6.14 per dollar by year-end.

‘Strong Signal’

Yuan depreciation may have stopped as the PBOC has “basically” achieved its goals, according to a June 11 front-page commentary in the state-controlled China Securities Journal. The central bank’s recent strengthening of the fixing was “a very strong signal” and government stimulus should stabilize the economy, which could be positive for the yuan, James Hu, who helps oversee $1.3 billion of assets at Income Partners Asset Management (HK) Ltd.

Non-deliverable forwards due in 12 months reached a 0.4 percent premium to the currency on June 9, the day after a report showed China’s trade surplus rose to $35.9 billion in May. That’s the most bullish signal from these contracts in more than two years and compares with an average discount of 1.1 percent over the past 12 months.

“The jump in the NDF premium reflects a turn in investor sentiment toward optimism, partly helped by the rise in the trade surplus,” Chi Lo, a Hong Kong-based strategist at BNP Paribas Investment Partners, which oversaw $661 billion as of March, said in a June 9 interview. “The renminbi may be poised to appreciate again soon, though we should not expect one-way moves.”

(An earlier version of this story corrected the assets under management for Income Partners.)

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