(Bloomberg) -- The forwards market is signaling expectations for further yuan losses as the currency is pressured by US President-elect Donald Trump’s tariff threats and angst over potential intervention from the authorities to temper bearish bets.
Dollar-offshore yuan tomorrow-next forward points, a gauge of short-term funding costs for the yuan via currency forward contracts, touched the highest since August this week. The pair’s one-month forwards jumped to the level last seen in April.
The surge in forward prices indicates strong demand and a rising cost to short the yuan, although the rate isn’t yet high enough to thwart bearish wagers on the currency.
There’s been increasing demand to borrow the yuan and short it in recent sessions, according to currency traders. Some institutions also raised offshore funds preemptively, fearing the authorities may intervene to squeeze liquidity and damp bearish bets on the currency, said the traders, who asked not to be identified.
A typhoon brewing over Hong Kong also impacted offshore yuan liquidity as fewer dealers made it to their offices in the morning, the traders said. The city’s one-month interbank rate for the offshore yuan climbed to 3.26%, the highest since July.
The offshore yuan fell to the lowest since late July as the dollar surged as part of so-called Trump trades. The prospect of 60% US tariffs being placed on Chinese goods under the Trump administration is another drag on the currency.
The People’s Bank of China has pushed back against yuan weakness with substantially stronger than expected currency fixings since Wednesday. The daily fixing, which limits moves in the onshore yuan by 2% on either side, is the PBOC’s most frequently-used tool to manage the currency.
Squeezing short positions via limiting yuan supply from state-owned banks is another tool the central bank can deploy to temper bearish wagers in the offshore market.
The higher forwards are in line with the message sent by the PBOC through its strong fixings — that they are stepping up efforts to prevent a disorderly decline of the yuan, said Becky Liu, head of China macro strategy at Standard Chartered Bank.
“Tightening offshore yuan liquidity is another signal to show their presence, although aggressive intervention probably isn’t needed yet,” she said.
--With assistance from Ran Li.
(Updates with typhoon impact in 5th paragraph.)
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