Week in FX Asia – PBoC Takes a Run at the Carry Trade

For many months, the market has been talking up the Chinese yuan with many speculators believing that the psychological six handle was going to be breached sometime soon, as in the first half of this year. It seems that policymakers at the People’s Bank of China (PBoC) have different ideas. Overall, this market is long CNY and adverse moves will be painful. The yuan is closing out this week trading at an eight-month low against the mighty greenback.

The dollar ended at CNY6.1450, the highest closing rate in eight months. At one point during Friday’s session, the dollar hit a 10-month high of CNY6.1808, which was at that time +0.9% higher from the previous sessions close, making it the biggest single day drop in nine years. The central bank’s stance seems to have taken the market by surprise. The PBoC used the usual channels through state banks to “guide” its own currency lower. The bank is obviously taking direct aim at the “carry trade” – borrowing USD at low rates and investing in the higher-yielding yuan, the ideal way to arb interest rate differentials.

The PBoC wants the market to know it’s serious, and is making a significant statement to all those speculators who believed that the yuan’s strength was to take a straight line higher. Data released earlier in the week continues to show that capital inflows remain healthy in January. State banks brought net $76.3 billion in the month, a 12-month high. It seems that both domestic and overseas interest prefer buying the yuan while shorting foreign currencies. The PBoC’s actions this week should have more seasoned speculators second-guessing their direct strategy route.

In the fixed-income space, Chinese bonds ended up trading lower as investors mostly took profit upon being the shut out for another month (Chinese 10’s backed up +10bps to +4.28%). The bond market remains apprehensive about potential downside risks due to expectations that Chinese funding costs could remain high throughout the year.

WEEK AHEAD

CNY Non-manufacturing PMI
USD ISM Manufacturing
AUD Reserve Bank of Australia Rate Decision
AUD Gross Domestic Product
EUR Euro-Zone Gross Domestic Product s.a.
CAD Bank of Canada Rate Decision
USD ISM Non-Manufacutring Composite
GBP Bank of England Rate Decision
EUR European Central Bank Rate Decision
USD Unemployment Rate
CAD Unemployment Rate
USD Change in Non-farm Payrolls

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell