Yuan has the doomy 7 in sights

(Bloomberg) — Bets are mounting that China’s currency will slide to a level not seen since the global financial crisis, as the government tries to shield the economy from a trade war.

The notional value of new options betting the yuan will weaken past the psychological milestone of 7 per dollar is at the highest since depreciation pressure really began to pick up in June. Last week saw more wagers added than in mid-August when the currency hit a 19-month low and authorities used verbal warnings and stronger fixings to deter speculators. Bears are also acting in the forwards market, where the offshore yuan’s 12-month outright contracts slid past 7 for the first time in over a year.

Bank of America Merrill Lynch and JPMorgan Chase & Co. are among the global banks to have lowered their yuan forecasts, predicting it will hit 7 versus the greenback within six months. That’s a level it hasn’t reached in more than a decade because the government — wary of capital outflows — hasn’t allowed it to.

“China may find yuan hitting 7 more acceptable now because it’s prioritizing looser liquidity over a strong exchange rate and it’s less concerned with fund outflows thanks to capital controls,” said Tommy Xie, an economist at Oversea-Chinese Banking Corp Ltd. in Singapore. “However, a break of the level will likely trigger faster drops in the yuan and hurt stocks, so we could see more intense official management at that point.”

The PBOC still has tools to arrest the yuan’s slide, from outright dollar sales to squeezing offshore liquidity. Indeed, there are already signs of tightening: one-month interbank borrowing costs in Hong Kong spiked on Tuesday to the highest since June 2017.

“I remain cautiously bearish on the yuan, but I think the path to 7 will be a bumpy one,” said Stephen Innes, Singapore-based head of Asia Pacific trading at Oanda Corp. The PBOC has “a massive war chest to right the ship.”

Bloomberg

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Stephen Innes

Stephen Innes

Head of Trading APAC at OANDA
Stephen has over 25 years of experience in the financial markets and currently based in Singapore as the Head of Trading Asia Pacific with OANDA. Stephen's market views focus on the movement of G-10 and ASEAN Currencies. His views appear in Bloomberg, CNBC.Reuters, New York Times WSJ and the Economist. His media appearances include Bloomberg TV & Radio, BBC International, Sky TV, Channel News Asia, ASTRO AWANI and BFM Malaysia. Stephen has an extensive trading experience in Spot and Forward FX, Currency and Interest Rate Futures, Money Market Derivatives and Precious Metals. Before joining OANDA, he worked with organisations like Nat West, Chemical Bank, Garvin Guy Butler, and Sumitomo Mitsui Banking Corporation. Stephen was born in Glasgow, Scotland, and holds a Degree in Economics from the University of Western Ontario.
Stephen Innes