Traders betting on a falling yuan are doing so at a time Beijing’s tolerance for currency weakness is at a minimum.
(Bloomberg) — Traders betting on a falling yuan are doing so at a time Beijing’s tolerance for currency weakness is at a minimum.
Bears were on the front foot when the currency fell almost 3% in February, its biggest drop in four months, and slid to the brink of the psychological level of 7 per dollar on Monday. But it then jumped the most in four weeks Wednesday following stronger-than-expected factory data and will shortly come under the close gaze of officials seeking to avoid wild swings.
The increase in volatility is happening right before China kicks off a two-week gathering of its top politicians and business executives on Sunday. The yuan’s rapid moves boost the prospect for the authorities to step in to curb fluctuations as they have a habit of keeping financial markets steady during important events to avoid any distraction.
Given the yuan is close to 7 and “there could another orchestrated FX market intervention to prevent herd behavior,” said Kiyong Seong, lead Asia macro strategist at Societe Generale SA in Hong Kong. “It would be hard to specify concrete intervention measures, but for sure they could be verbal intervention.”
The yuan has weakened from this year’s high set in January as an increasingly hawkish outlook for the Federal Reserve has revived the dollar, while geopolitical tensions between the US and China have weighed on the Asian nation’s currency. The yuan was at 6.8878 per dollar on Thursday.
The National People’s Congress is the first annual gathering of the nation’s parliament since the end of the Covid Zero policy, and will see top leaders unveil their plans to revive the economy. New incumbents for high-level positions including premier and central-bank governor will also be announced.
“If the new leadership brings out more economic stimulus, which boosts domestic sentiment and attracts equity inflows, the yuan will benefit from the support of foreign inflows,” said Lemon Zhang, a strategist at Barclays Plc in Singapore. The yuan is likely to hold around 7 per dollar at mid-year before appreciating to 6.7 by year-end, she said.
Next ‘Red Line’
Still, some analysts believe potential gains from the NPC are likely to be short-lived.
Despite Wednesday’s rebound due to the factory data, the currency has a long way to go before erasing the losses it has made since the middle of January and there remains a lot of uncertainty over the pace of the economic recovery.
“Any property-easing measures, or credit stimulus could be positive in the short-term for the yuan, but in the medium-term the rise in Chinese domestic demand points to higher imports and a weaker trade surplus,” said Maximillian Lin, Asia rates and currency strategist at Credit Suisse Group AG in Singapore.
The People’s Bank of China is unlikely to try and stop the yuan weakening past 7 per dollar and instead will be watching 7.30 which is the next “red line,” he said.
Others don’t see the PBOC as being in any hurry to intervene.
“As exports are weak at the moment, the need or incentive for the central bank to step in is not very high unless we see notably spillover effect from currency weakness to financial markets,” said Ju Wang, head of Greater China FX and rates strategy at BNP Paribas SA in Hong Kong.
–With assistance from Ran Li.
(Updates with prices the yuan’s prices on Thursday.)
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