Offshore Yuan Forwards Signal Depreciation Bets at Two-Year Low

  • Bears surrendering, getting out of short trades: Mizuho
  • PBOC says it will keep exchange rate at equilibrium level

The difference between the offshore yuan’s forward contracts and the spot rate narrowed to near a two-year low, reflecting reduced depreciation expectations as China’s policy makers pledge stability for the currency.

The nation will keep the exchange rate basically steady at an equilibrium level, the People’s Bank of China said in a statement Wednesday. That goal is being made easier by signs that the world’s second-largest economy is stabilizing and by waning expectations of a Federal Reserve interest-rate increase. The chances of the yuan sliding to 7 per dollar this year receded to 9.7 percent Thursday, less than a third of the odds given in January, options prices show.

The paring of depreciation bets follows increasing indications that the authorities will fight excessive declines, with the central bank suspected of defending the level of 6.7 a dollar last month and its deputy governor saying the nation is “working hard” for stability against a basket of currencies. China will host a Group of 20 summit in the eastern city of Hangzhou in September and the yuan will enter the International Monetary Fund’s reserves in October. A private factory gauge from Caixin Media and Markit Economics suggested expansion in the manufacturing sector last month.

Suspected Intervention

"Bears surrendered -- they need to stop loss for shorting the offshore yuan with forwards," said Ken Cheung, a strategist at Mizuho Bank Ltd. in Hong Kong. "Suspected currency intervention onshore has reversed bearish expectation, and recent economic data show China’s economy is stable. The PBOC will likely keep the currency stable in the near term."

The discount of 12-month forward contracts on the offshore yuan to the spot rate dropped to 1,085 as of 4:58 p.m. in Hong Kong, according to data compiled by Bloomberg. That’s close to Wednesday’s low of 1,065, the least since July 2014. The yuan traded in Hong Hong dropped by 0.03 percent to 6.6455 a dollar, while the onshore rate in Shanghai weakened by 0.06 percent. A Bloomberg replica of the trade-weighted CFETS RMB Index, which tracks the yuan against 13 currencies, fell for a fourth day.

"The yuan will be stable to strong in the near term, as the dollar drops on waning expectation for monetary tightening this year and as the yen strengthens," said Kenix Lai, a Hong Kong-based foreign-exchange analyst at Bank of East Asia Ltd. "The Chinese currency will decline in the longer term, but the government will keep the process slow to avoid capital outflows."

— With assistance by Tian Chen

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