Offshore Yuan Falls for Second Day as Bears Reload After Squeeze

  • StanChart, NAB strategists predict continued weakness
  • Traders increase bets that offshore yuan will decline

A Deep Dive Into Currencies: Yuan, Pound, EM

The yuan’s volatile start to 2017 showed no signs of abating, with the offshore currency tumbling for a second day as China’s central bank weakened its fixing by the most since June.

The exchange rate fell 0.5 percent to 6.8844 per dollar as of 5:24 p.m. in Hong Kong, extending a 0.9 percent drop on Friday that was the biggest in a year. The offshore yuan is set to post the biggest two-day slump since June today, after moving 0.5 percent or more in four of the six trading sessions so far this year, a magnitude it only surpassed 11 times in all of 2016.

Yuan bears were confronted by a short squeeze last week, with soaring funding costs helping the offshore currency to a record weekly advance. National Australia Bank Ltd. and Standard Chartered Bank strategists are among those who say the gains won’t last, predicting a return to yuan weakness on the back of dollar strength. The People’s Bank of China weakened the currency’s daily reference rate by 0.87 percent on Monday after the greenback rallied.

“Most people are quite realistic in expecting the firmer dollar environment to weigh on the yuan,” said Christy Tan, head of markets strategy in Hong Kong at National Australia Bank. “The liquidity conditions have not normalized yet, but expectations have not shifted drastically even with the recent bout of strong yuan appreciation.”

Falling Rates

Offshore liquidity improved on Monday. The overnight yuan interbank rate in Hong Kong, known as Hibor, fell 47.3 percentage points to 14.05 percent, while the offshore yuan’s overnight deposit rate slumped to 12.5 percentage points after reaching a record 105 percent on Friday. The onshore yuan was little changed at 6.9355.

Risk reversals show bearish bets on the currency rose, with the six-month rate rising to 2.055 percent from 1.970 percent on Friday. Other indicators showed some traders are betting the surge in volatility won’t last long. While expectations for swings in the currency over the next month jumped by 1.2 percentage points last week, a gauge tracking wagers for yuan turbulence over six months fell and is now near a one-year low relative to the short-term measure.

China’s foreign-exchange reserves fell for a sixth straight month in December, dropping $41.1 billion to a five-year low of $3.01 trillion, which was in line with the median estimate in a Bloomberg’s survey of economists. The PBOC’s effort to stabilize the yuan was the main reason for the drop last month and last year, the State Administration of Foreign Exchange said in a statement.

"With FX reserves dropping toward $3 trillion, FX intervention becomes less palatable to them," said Eric Robertsen, Singapore-based head of global macro strategy and currency research at Standard Chartered Bank, in a Bloomberg Television interview. "Over time, we expect that with further dollar strength, the yuan should continue to weaken."

— With assistance by Helen Sun, Rishaad Salamat, and Cecile Vannucci

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