Speculators who believe that China will soon devalue the yuan are placing their bets through the currency’s cheaper offshore forwards market, and they are expecting the big move in March or April.
The speculation has been sparked by trends in China’s daily benchmark rate for the tightly managed yuan and weakness in the currency that resemble the pattern in the days preceding the surprise August 2015 devaluation.
China’s stock and yuan markets have been under pressure in 2016, battered by fears of capital outflows and a slowing economy.
Officials in China, which has the world’s largest foreign exchange reserves, have repeatedly said they have the firepower to keep the yuan stable.
On Saturday, Xinhua news agency quoted Premier Li Keqiang as saying China has “no intention of stimulating exports via competitive devaluation of currencies.”
As authorities clamped down on speculative selling of the yuan’s offshore unit, its non-deliverable forwards market has become an easier and cheaper alterative for punters.
The NDF market shows the yuan staying close to the current spot rate of 6.58 per dollar for the next month, then falling 0.9% in the second month. The NDFs have priced in a decline of 1.4% toward the end of April.
“NDF spreads are compressed up to 2 months, and then getting paid up,” said one emerging market currency trader in Singapore.
“The market is betting on the yuan fixing flatlining for at least two months and then a big depreciation, just like in August.”
Tough to predict
While playing the spreads, such as simultaneously buying the short-term yuan and selling it over the medium term via NDFs, is an attractive hedge, the trader also said it was tough predicting timing of a one-off devaluation.
The yuan’s 2% Aug 11 devaluation came after the People’s Bank of China (PBOC) kept its fixing rate almost unchanged for three months, and after the yuan traded at the weak end of its band for more than eight months.
Now, expectations are heavily skewed toward the need for China to devalue its currency, particularly to cope with slowing global demand and massive domestic debt. At the same time, Chinese authorities have committed to liberalizing the currency further before it enters the International Monetary Fund’s SDR basket this year.
