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Yuan’s Gains May Be Capped After PBOC Cuts Shorting Costs

Published 10/11/2020, 01:07 PM
Updated 10/11/2020, 01:27 PM
© Reuters.  Yuan’s Gains May Be Capped After PBOC Cuts Shorting Costs

(Bloomberg) -- The yuan may come under pressure in early Monday trade, dragging Asian counterparts lower with it, after authorities made it easier to bet against the currency’s gains.

Financial institutions will no longer need to set aside cash when purchasing foreign exchange for clients through currency forwards, effective Monday, the People’s Bank of China said Saturday. The measure comes in the wake of Friday’s 1.4% surge in the yuan, its biggest advance in more than 13 years, and makes the central bank’s daily currency fixing a key focus when markets open.

This “may be an attempt to moderate the yuan’s increase,” Marc Chandler, chief market strategist at Bannockburn Global in New York, wrote in a report Sunday. “When the PBOC last did this, in September 2017, the yuan fell around 2.5% in the following few weeks.”

A similar move now would bring the onshore yuan toward 6.8650 per dollar, Chandler said. The currency closed on Friday at about 6.6930 per dollar, its strongest level since April 2019.

The central bank’s latest move comes against the backdrop of a slide in the dollar that’s been fueled by unprecedented U.S. stimulus efforts to counter the fallout from the Covid-19 pandemic. The yuan has just had its best quarter in 12 years versus the U.S. currency, appreciating more than 4%.

Banks previously had to hold 20% of sales on some foreign-exchange forward contracts, a rule imposed two years ago when the currency slumped toward 7 per dollar.

As well as the result of the fixing, the yuan’s move on Monday will also depend on the extent of official intervention to amplify the apparent message from authorities to calm the yuan’s strength.

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On the three previous occasions when the rule was changed, it was accompanied by a miss or a change in the fixing rate, although this varied from 0.1% to 0.5%, according to a Bloomberg study. The onshore yuan moved by an average of 0.5% within 24 hours of the rule change and was roughly sustained a week after the rule change.

©2020 Bloomberg L.P.

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