Yuan Short Sellers Are Paying Up as China Squeezes Their Funding

  • Implied yields on one-month forwards rose above ruble, lira
  • UBS says buy the yuan versus the Indian rupee on higher yields

Betting against the yuan is becoming more expensive.

Implied yields on one-month non-deliverable forwards for the yuan, which reflect the costs of selling short the currency, jumped to an annualized 11.4 percent Thursday, from about 4 percent at the end of October, according to data compiled by Bloomberg. That is the highest among the 31 most-traded currencies, except for the Brazilian real and Argentina’s peso.

The cost to short the yuan increased as more traders sold the currency using the forward contracts, betting that capital outflows from China will to lead to a decline in value. Policy makers also drove up the costs for short sellers as they tightened restrictions on money flows, including reducing the yuan supply overseas and requiring banks to limit currency speculation.

“Higher implied yields make it harder to short the yuan, which supports the Chinese currency,” Binqi Liu, who helps oversee $20 billion at HSBC Global Asset Management, said by telephone from London. “The more pressure for the yuan to depreciate on a big scale, the more Chinese authorities will defend it.”

The onshore yuan is trading near a five-year low, closing at 6.5797 per dollar Thursday. The one-month non-deliverable forwards traded at 6.618 per dollar, or about 1 percent weaker. Investors use the forwards to hedge or speculate on the currency.

China this week required lenders in offshore yuan-trading centers to lock away a share of deposits as reserves in the central bank. That followed large-scale intervention in Hong Kong last week that sent yuan borrowing rates in the city soaring to a record as liquidity was temporarily crunched.

“Liquidity is tightening in Hong Kong,” said Kieran Curtis, an emerging-market money manager at Edinburgh-based Standard Life. “Reserve requirements are making it even tighter, along with the spot intervention.”

UBS AG recommended its clients buy the yuan versus the Indian rupee via three-month forwards on Jan. 12. Higher yields protect the yuan, while other emerging-market currencies including the rupee will catch up with the volatility in the yuan, strategists led by Bhanu Baweja wrote in a report.

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