A record low in the cost of borrowing yuan by at least one measure is heaping pressure on the embattled currency, which is weakening toward a 16-year nadir against the dollar.
(Bloomberg) — A record low in the cost of borrowing yuan by at least one measure is heaping pressure on the embattled currency, which is weakening toward a 16-year nadir against the dollar.
A gauge measuring yuan funding costs in the FX forwards market tumbled to an all-time low this week, meaning it’s increasingly profitable for investors to borrow Chinese currency and use it to buy the greenback. That is adding to a raft of factors that are driving the yuan lower, such as the nation’s gloomy economic outlook and the hawkish stance of the Federal Reserve.
Behind the slide in the indicator, or the so-called dollar-yuan forward points, is the widening policy divergence between China and the US. While the Fed is sticking with its tightening path to combat inflation, Beijing has been adopting a looser monetary policy to stimulate growth.
The net result — the yuan is headed for its third straight month of declines.
Chinese policymakers are taking note. In a bid to repair market confidence, they set the managed currency’s reference rate at a stronger-than-expected level for four times this week and state-owned banks were seen selling dollars on several occasions.
The People’s Bank of China has more tools at its disposal if it wishes to curb depreciation and the fixing loses its punch. They include loosening liquidity of foreign-exchange onshore and reducing capital outflows.
And if history is any guide, Beijing could even go as far as pushing the forward points to restrictive levels. In the aftermath of a shock devaluation eight years ago, the central bank burnt bears by engineering an epic spike in borrowing costs.
However, such extreme measures are less likely nowadays given the PBOC has said it stopped regular intervention.
The yield differentials between China and US “are unlikely to improve meaningfully before dollar rates ease more rapidly,” Frances Cheung, strategist at Overseas Chinese Banking Corp, wrote in a note this week. The interest rates on the yuan keep falling before China announces a stimulus package, she added.
The offshore yuan hovered near its seven-month low at 7.2656 on Friday, while 12-month dollar-yuan forward points dropped to minus 2,175.
(Updated with Friday’s yuan fixing in the fifth paragraph and prices in the last paragraph.)
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