Top Yuan Forecaster Exits Long Trade After Making 4.5% Gain

  • Skandinaviska Enskilda Banken expects currency to weaken
  • Strong exchange rate unwanted amid slowing exports: Yokota

The Taming of the Yuan

The top-ranked yuan forecaster is betting the currency’s stunning advance has run its course for now.

Skandinaviska Enskilda Banken AB has exited its long positions after making a 4.5 percent profit this year, according to Sean Yokota, the bank’s head of Asia strategy in Singapore and the most accurate forecaster for the yuan in the second quarter as ranked by Bloomberg. The exchange rate will weaken 0.5 percent by the end of 2017, as weaker export growth discourages the People’s Bank of China from guiding the yuan stronger, he said.

“Into year-end 2017, I think much of the move lower in the dollar-yuan rate is finished,” said Yokota. “The PBOC’s fixing behavior has recently turned more neutral and does not show a bias to strengthen the yuan against the dollar as we saw in May and June. The PBOC doesn’t need to see a strong currency when exports are slowing.”

The Chinese currency was down 0.27 percent, the most in six months, at 6.6662 per dollar as of 5:30 p.m. in Shanghai on Friday. That snapped a four-day advance of 1.2 percent that had pushed the yuan to the strongest level since August 2016.

The exchange rate has jumped 3.6 percent in the past three months amid weakness in the dollar and as authorities used direct intervention and policy changes to prop up the exchange rate. While the nation’s outbound shipments grew 7.2 percent in July, that’s down from 16 percent in March. The yuan has also appreciated against its trading peers, with the Bloomberg replica of the CFETS RMB Index rising for 11 straight days to its highest level since March on Friday.

The currency’s rally has steepened this month as tense relations between North Korea and the U.S make global investors increasingly risk averse, with the nation’s central bank supporting the yuan with a series of strong fixings.

Technical analysis suggests the surge may be overdone. The dollar’s 14-day relative-strength index against the yuan dropped to 16 on Thursday, below the 30 threshold that indicates to some traders that the U.S. currency will strengthen. It was last at 26 after the yuan’s slump Friday. The Chinese exchange rate’s implied volatility has picked up, with the one-month tenor rising to a two-month high, while its three-month risk reversal -- an indicator of traders’ willingness to bet against the yuan -- has rebounded from its lowest level since 2014.

“It’s not a great idea to long the yuan against the dollar aggressively at this point,” said Gao Qi, a currency strategist at Scotiabank in Singapore. “The yuan’s advance was already very fast and even a bit bizarre, so I don’t expect it will hit 6.6 per greenback easily. It will likely fluctuate in the third quarter.”

Any retreat in the yuan will likely be mild, Gao said. Policy makers will want to ensure financial markets are stable before the twice-a-decade party leadership reshuffle toward the end of this year. The currency has recovered ground in 2017 after tumbling 6.5 percent last year, the most since 1994.

“Yuan bears are covering their long dollar-yuan positions, and I don’t think we have moved to the point where people are outright short the greenback against the yuan,” said SEB’s Yokota, who expects the yuan to end this year at 6.7 per dollar and to rise to 6.5 by 2018. “Usually into year-end rates shoot up higher temporarily and provide a good entry to go long the onshore or offshore yuan. If that happens again, we’ll look to go long yuan again.”

— With assistance by Tian Chen

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