Yuan Forwards Sink to Biggest Discount to PBOC Fixing Since 2008

By Ye Xie and Justina Lee  

Yuan forwards are trading at the biggest discount to the official exchange rate in six years as China’s economic growth slows and the dollar surges amid expectations for higher U.S. interest rates.
Twelve-month non-deliverable forwards dropped 0.5 percent, the most since March 10, to 6.3482 a dollar on Thursday in New York, according to data compiled by Bloomberg. The contracts, which traders use to speculate on or hedge against moves in the yuan, are 3.6 percent weaker than the central bank’s reference rate, the most since December 2008.
A preliminary Purchasing Managers’ Index by HSBC Holdings Plc and Markit Economics showed this week that manufacturing in the world’s second-largest economy contracted in December for the first time since May, adding to signs that China is losing momentum. Federal Reserve Chair Janet Yellen said on Wednesday in Washington that the central bank is
on course to raise borrowing costs, though not right away, sending the Bloomberg Dollar Spot Index to the highest since 2009.
The yuan is “unlikely to offer a sanctuary with growth slowdown deepening,” Andy Ji, a Singapore-based strategist at Commonwealth Bank of Australia, said in a note.
In the spot market, the yuan fell 0.3 percent to 6.2163 a dollar in Shanghai on Thursday, the weakest close since June, extending its decline this year to 2.6 percent, China Foreign Exchange Trade System prices show. That would be the biggest annual drop since 1994, when China unified official and market exchange rates, data compiled by Bloomberg show.

Fighting Depreciation

Policy makers have resisted pressure to weaken the currency in recent weeks, setting the official quote, known as the fixing, at 6.1195 a dollar, or about 1.6 percent stronger than the market rate. The currency is allowed to fluctuate 2 percent up or down from the daily fixing.
Stronger fixings suggest that “the authorities are not willing to sponsor higher levels in dollar-yuan,” Jonathan Cavenagh, a currency strategist at Westpac Banking Corp. in Singapore, wrote in a note on Dec. 16. “This is likely to reflect China’s strong structural current-account surplus position, a desire to avoid strong capital outflow pressures and to maintain positive momentum around the internationalization of the Chinese currency.”
China posted a record trade surplus of $54.47 billion in November, as imports fell. The median forecast of 55 strategists surveyed by Bloomberg is for the yuan to rise 2.1 percent to 6.09 a dollar by the end of 2015.