China sends warning signal to yuan bears


Hong Kong • China’s central bank is making it clear to yuan bears that short-term declines are no sure thing, especially in the run-up to a crucial meeting at the end of this month.

The People’s Bank of China (PBoC) set its daily reference rate for the currency at higher than market watchers expected for a 10th straight day yesterday, the longest run since September. The strong bias on Tuesday was the largest since Bloomberg began releasing fixing forecasts in August 2017. The central bank also announced plans to sell bonds in Hong Kong in June — which would support the offshore rate.

That helped the yuan climb by the most in two months on Tuesday. It was down by 0.03% to 6.913 per dollar as of 4pm local time yesterday.
The moves came after the yuan neared a decade low and US President Donald Trump threatened to raise tariffs on China again if President Xi Jinping doesn’t meet with him in Osaka at the Group of 20 (G-20) summit.

While PBoC governor Yi Gang said last week that no particular level for the yuan is important, the official actions suggest to analysts that the authorities want to avoid one-way depreciation bets. The yuan hasn’t breached the seven per dollar level since the global financial crisis.

“The PBoC may attempt to keep yuan stability in the near term to keep the hope for a trade deal at the G-20 summit alive,” said Ken Cheung, a senior currency strategist at Mizuho Bank Ltd. Beyond that, however, the central bank may need to “help market participants to digest the psychological seven level”.

The offshore yuan’s three-week implied volatility, the expiration date of which covers the G-20 meeting, surged the most in nearly a month on Tuesday. This may suggest traders are bracing for the G-20 to trigger a large move.

But before the summit, the yuan will be kept steady, and it may advance if China and the US reach a deal, said Stephen Innes, managing partner at Vanguard Markets Pte Ltd in Singapore. “Given my position of longing the dollar against the yuan, this is what keeps me up at night.”

To some, the central bank’s policy is clear. The consistently stronger than expected fixing and the timing of bills to be sold in Hong Kong show that the PBoC hasn’t set aside the seven level, according to Becky Liu, head of China macro strategy at Standard Chartered plc.

“From the policymaker’s perspective, obviously you’re not going to tell the world that seven is the hard line,” she said, adding that officials are still saying that the yuan will keep steady. “In reality, it just means that they have no plans to let go of seven yet.”