Photographer: Qilai Shen/Bloomberg

Yuan Traders Most Bearish in Almost Four Months as Costs Surge

Updated on
  • Bonds extend drop as 10-year yield rises to seven-week high
  • PBOC gauges demand for 28-day reverse-repurchase agreements

Traders are the most bearish on the yuan in almost four months as rising odds of a U.S. interest-rate increase boost the dollar and the cost of borrowing the Chinese currency in Hong Kong jumps.

Twelve-month non-deliverable forward contracts traded at a 2.87 percent discount to the spot rate, compared with Friday’s 2.9 percent that was the biggest gap since May 18, data compiled by Bloomberg show. The offshore yuan erased the day’s losses amid intervention speculation. The three-month Hong Kong Interbank Offered Rate climbed 95 basis points, the most since February, to 4.21 percent, according to Treasury Markets Association data.

The Chinese currency is Asia’s worst performer this year with a 2.8 percent drop against the greenback as traders bet the central bank will allow the yuan to weaken to cushion the nation’s exporters amid an economic slowdown. The Bloomberg Dollar Spot Index jumped 0.5 percent on Friday after Federal Reserve Bank of Boston President Eric Rosengren said the U.S. economy could overheat should policy makers wait too long to tighten.

"People still have a bearish bias on the yuan, as reflected in the forwards market," said Ken Cheung, a foreign-exchange strategist at Mizuho Bank Ltd. "The market has priced in a higher chance for a rate hike in September after Rosengren’s comments."

Bond Selloff

The next U.S. policy review will be held in Washington Sept. 20-21, with the probability of a hike then at 30 percent, from 20 percent a month ago, according to Fed funds futures tracked by Bloomberg. The yuan in Hong Kong’s offshore market was trading 0.08 stronger for the day at 6.6907 per dollar as of 4:44 p.m., while 12-month non-deliverable forwards were at 6.8741, near the weakest level since February. At least three major Chinese banks were seen selling dollars, according to traders.

The Chinese government has both the intention and the capability to keep the exchange rate largely stable in the foreseeable future, even as there are a few factors that have helped to form depreciation expectations, Huang Yiping, an adviser to the People’s Bank of China, wrote in an e-mailed reply to interview requests.

Chinese government debt followed a global bond selloff, with the 10-year yield rising two basis points to 2.80 percent, according to National Interbank Funding Center prices. That’s the highest for the similar-maturity benchmark since July 25. Yields have climbed since dropping to a decade-low of 2.64 percent on Aug. 15. The Shanghai Composite Index slid 1.9 percent after going the past 19 sessions without a 1 percent closing move in either direction.

Demand Gauging

The PBOC gauged demand for 28-day, 14-day and seven-day reverse-repurchase agreements on Monday for Tuesday, according to traders at primary dealers required to bid at the auctions. The overnight repurchase rate, a gauge of interbank funding availability, rose for a sixth day, adding four basis points to 2.13 percent, the highest in more than two weeks, weighted average prices show.

The China Securities Depository and Clearing Corp. has proposed tightening of leverage rules in the onshore bond market, including limiting outstanding repurchase contracts at 70 percent of debt holdings, according to a statement posted on the clearing house’s website on Friday.

Tightening in the onshore money market may have led to some liquidity outflows from Hong Kong, contributing to rising yuan interest rates offshore, said Terry Siu, treasurer at Wing Lung Bank Ltd. in Hong Kong.

China’s markets will be closed on Thursday and Friday for public holidays, while data Tuesday will provide clues on the state of the economy.

“Apart from the intention to ensure steady liquidity ahead of holidays, the central bank also wants to provide longer-term money as interest-rate increases in other markets are prompting lenders to hoard cash," said Shi Lei, head of fixed income research at Ping An Securities Co. in Beijing.

— With assistance by Helen Sun, Tian Chen, Wenwen Zhang, Ran Li, Ling Zeng, and Karen Yeung

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