Yuan bears are on the prowl, emboldened by a belief that policymakers in China can do little to battle the surging US dollar.
The onshore yuan resumed its decline yesterday after gaining in the morning session in Asia following verbal warnings from the People’s Bank of China (PBOC), which cautioned against speculation on the currency and said it had “plenty of experience” in fending off shocks.
However, a bout of risk-off sentiment sent the onshore yuan back toward a 14-year low touched on Wednesday.
Photo: EPA
Three-month risk reversals, which measure the cost of hedging against offshore yuan losses, soared over the past few days and briefly exceeded 1.5 percent on Wednesday.
Still, the gauge remains lower than it reached in May and well below the peaks set two years ago at the height of the COVID-19 pandemic.
“There’s not much else the authorities can do at this stage apart from really trying to enforce capital controls more aggressively,” Bank of Singapore Ltd chief economist Mansoor Mohi-uddin said. “They don’t have a very strong hand at this stage vis-a-vis market forces.”
The PBOC’s headache is shared by policymakers worldwide as the US dollar’s surge shows no sign of abating.
However, the yuan’s accelerated decline since last month is also driven by signs China’s economy is cooling due to COVID-19 lockdowns and a housing-market crisis.
While the US Federal Reserve and most other central banks aggressively hike interest rates, China has kept monetary policy loose, sending yields on yuan-denominated bonds below those on US Treasuries.
The PBOC has set stronger-than-expected yuan exchange rate fixings for 26 straight sessions, the longest streak on record since Bloomberg started surveys with market participants in 2018.
Jefferies Financial Group Inc FX strategist Brad Bechtel is among those who see the yuan weakening to 7.3 to 7.4 versus the US dollar.
“The PBOC has been making tweaks around the edges of the FX market for some time now without being overly aggressive,” Bechtel said. “They don’t want to be heavy-handed, but they are trying to slow the move as much as they can while still maintaining two-way markets.”
China’s dilemma is that it cannot afford to shore up its currency too much. Its export complex is slowing as the global economy cools, while the yuan is still firm relative to the currencies of export-focused regional peers.
TD Securities head of emerging markets strategy Mitul Kotecha expects the PBOC to resort to direct intervention and other aggressive measures only if depreciation moves are sharp.
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