China’s Dig At Yuan Speculators Could Backfire

Beijing’s attack on yuan speculators has proven extraordinarily successful, so much so that traders no longer see it as a short-term intervention but a deeper market shift that has now gained a self-reinforcing momentum.

That’s bad news for speculators still holding onto bullish yuan positions. And for the People’s Bank of China (PBOC), the risk is it has unleashed bearish forces it may not be able to rein in, souring enthusiasm for the yuan and complicating the push to increase the international adoption of the currency.

“The market had expected the yuan’s weakness to last no more than a few weeks, but the PBOC has now sent clear signals that it is the central bank, not the market, that will decide when the yuan’s weakness will end,” said a trader at a European bank in Shanghai.

“With the PBOC giving no signal that it intends to do so, corporates have become alarmed, and many are now building dollar positions to hedge.”

Since the central bank started aggressively pushing the currency lower in February, to shake the market out the view the yuan was a one-way bet, it has fallen more than 3 percent and more than unwound its gains of 2013.

On Wednesday, it touched an 18-month low of 6.2676 per dollar. Markets were closed for holidays on Thursday and Friday.

via Reuters

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza