Offshore yuan forwards show bears’ confidence has been shaken

(From Bloomberg)

    • Contracts’ discount to spot rate is near a one-month low
    • Onshore yuan jumped Monday by most since peg scrapped in 2005

Global investors are winding in bets on a yuan devaluation as a dollar rally reverses at the same time as China strengthens support for its currency.

Twelve-month forwards for the offshore yuan rallied 2 percent so far this month in Hong Kong, outperforming the exchange rate’s 1.2 percent gain, data compiled by Bloomberg show. The contracts are about 3.5 percent weaker than the spot rate, a gap that reached a one-month low of 3.3 percent on Thursday after widening to a record 5 percent in January. All of the Group of 10 currencies have gained ground on the dollar in February as prospects for a U.S. interest-rate increase dimmed.

“The bears are being challenged,” said Sim Moh Siong, a foreign-exchange strategist at Bank of Singapore Ltd. “The verdict is out whether the dollar weakness will continue. What’s happening in Asian and emerging-market currencies right now rests on what the Fed is going to do and whether it will hike or not.”

The pullback in bearish bets against the yuan will provide some relief for China, which tightened curbs on capital outflows and burnt through almost $300 billion of its foreign-exchange reserves in the last three months propping up the exchange rate. Officials including central bank Governor Zhou Xiaochuan have voiced support for the currency this year and articles in state-controlled media were used to warn that bets against the currency would fail. Read more

Categories: Asia Unhedged, China

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