China currency slide back on global markets radar

26/12/2016 08:00 AST

China’s weakening yuan is threatening a reprise of the storm that dominated world markets at the start of 2016, with Beijing’s ability to stamp on short-term speculators undermined by a broader consensus among major global investors that the currency will fall.

Hedge funds have been chastened by the squeeze on speculative investors orchestrated by Chinese authorities last January, but many of the underlying pressures on the currency remain and the early signs of tensions to come with US President-elect Donald Trump has upped the ante.

Beijing’s ability to hold the currency stable over the next six months may not be in doubt but it will likely spend big again in doing so and, counter-intuitively, the lack of explicit speculation may make the pressure more difficult to defuse this time around.

A year ago, China spent the best part of six months fighting running battles to support the renminbi in the offshore market where the currency is allowed more room to move and which provides a leading indicator for its more tightly controlled onshore version.

Much of that pressure, relieved after Chinese New Year in February, stemmed from Chinese firms closing out “carry trades” based on higher domestic interest rates and the yuan gains that were a one way bet for most of the past decade.

As that effect waned, Beijing was able to quash a group of fund managers, some veterans of the 2008 big shorts of the US mortgage market, who took George Soros-style bets in the options market on officials being forced into a one-off devaluation.

But this time, a number of measures suggest the weaker yuan trade is regarded as both a more certain bet and one supported by a more conservative group of long-term “real money” investors who tend to only jump on bigger consensus trends.

“Being bullish on the dollar as we are, we see the renminbi continuing to weaken next year,” said Roger Hallam, who manages $260bn in exposure as JPMorgan Asset Management’s head of currency management in London.

“We are at 6.90 (yuan per dollar) now. If you look at the 3-month forward it says (we will reach) 7.0.

So something closer to 7.25 next year is not unreasonable.” Sales desks at banks say major US and European investors have laid large bets in currency options over the past month, with strikes ranging from 7.25 to 8.00 yuan per dollar, coming due in six months to a year. Goldman Sachs last month made a fall to 7.30 per dollar one of its handful of big market bets for 2017.

Yet in a market where daily moves in the dollar against the euro or yen in the past six months have often topped 1%, fund managers say entering at the right time is crucial to making a profit on the yuan’s more controlled fall.

Even if the yuan falls to 7.25, that would only be around a 4% fall from current levels — a quarter of what the yen has fallen against the dollar in the past five weeks.

James Kwok, head of currency management at France’s Amundi, has been betting against the yuan since the dust settled on last January’s moves and he thinks it will fall again next year. But he said earlier this month he had cashed out for now.

“We closed our short position in Chinese yuan recently,” he said.”I don’t think in any single year the currency can go so far when the current account surplus is still there.” Underlying the banks’ forecasts and the positions being taken is the confidence generated by Beijing’s ability to quell a harder fall in the yuan a year ago. Authorities there have been open about the need to let the currency depreciate but also stressed they would prevent any kind of disorderly move.

So far so good. But the comparisons to a year ago are also growing. An $87bn fall in the country’s currency reserves in November last year — a sign of the volume of dollars it has to sell to stop the yuan crashing — prefaced drops of $100bn or more in December and January that

Gulf Times