U.S. Markets closed

China Sends Warning Signal to Yuan Bears Before G-20 Meeting

Tian Chen and Livia Yap
1 / 2
China Sends Warning Signal to Yuan Bears Before G-20 Meeting

(Bloomberg) -- China’s central bank is making it clear to yuan bears that short-term declines are no sure thing, especially in the run up to a crucial meeting at the end of this month.

The People’s Bank of China set its daily reference rate for the currency at higher than market watchers expected for a 10th straight day on Wednesday, the longest run since September. The strong bias on Tuesday was the largest since Bloomberg began releasing fixing forecasts in August 2017. The central banks also announced plans to sell bonds in Hong Kong in June -- which would support the offshore rate.

That helped the yuan climb by the most in two months on Tuesday. It was down by 0.03% to 6.913 per dollar as of 4 p.m. local time on Wednesday.

The moves came after the yuan neared a decade-low and President Donald Trump threatened to raise tariffs on China again if President Xi Jinping doesn’t meet with him in Osaka at the Group of 20 summit.

While PBOC Governor Yi Gang said last week that no particular level for the yuan is important, the official actions suggest to analysts that the authorities want to avoid one-way depreciation bets. The yuan hasn’t breached the 7 per dollar level since the global financial crisis.

“The PBOC may attempt to keep RMB stability in the near term to keep the hope for a trade deal at G-20 summit alive,” said Ken Cheung, a senior currency strategist at Mizuho Bank Ltd. Beyond that, however, the central bank may need to "help market participants to digest the psychological 7 level.”

The offshore yuan’s three-week implied volatility, the expiration date of which covers the G-20 meeting, surged the most in nearly a month on Tuesday. This may suggest traders are bracing for the G-20 to trigger a large move.

Speaking of EM: China’s Yuan Stance Raises a Conundrum (Podcast)

But before the summit, the yuan will be kept steady, and it may advance if China and the U.S. reach a deal, said Stephen Innes, managing partner at Vanguard Markets Pte. in Singapore. "Given my position of longing the dollar against the yuan, this is what keeps me up at night."

To some, the central bank’s policy is clear. The consistently stronger-than-expected fixing and the timing of bills to be sold in Hong Kong show that the PBOC hasn’t set aside the 7 level, according to Becky Liu, head of China macro strategy at Standard Chartered Plc.

“From the policy maker’s perspective, obviously you’re not going to tell the world that 7 is the hard line,” she said, adding that officials are still saying that the yuan will keep steady. “In reality, it just means that they have no plans to let go of 7 yet.”

(Updates yuan prices in third paragraph.)

--With assistance from Ran Li and Philip Glamann.

To contact the reporters on this story: Tian Chen in Hong Kong at tchen259@bloomberg.net;Livia Yap in Singapore at lyap14@bloomberg.net

To contact the editors responsible for this story: Sofia Horta e Costa at shortaecosta@bloomberg.net, David Watkins

For more articles like this, please visit us at bloomberg.com

©2019 Bloomberg L.P.