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Yuan Pressure Mounting as Green Shoots Fail to Lift Mood

Yuan Pressure Mounting as Green Shoots Fail to Lift Mood

(Bloomberg) -- The yuan is a whisker away from the weak end of its onshore trading band, the latest sign that a recent slew of upbeat economic data hasn’t been enough to bolster the Chinese currency.

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China’s currency slid to a four-month low against the dollar in onshore trading Tuesday and came within a few pips of the lower end of the trading range permitted by the central bank. In the more freely traded offshore market, the yuan has been hovering at a weaker level than the onshore daily limit for some eight consecutive sessions. Signs of stress are also growing in the options market.

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The persistent pressure on the currency indicates that traders expect Beijing to lean on a weaker yuan to help revive growth in the absence of massive stimulus. Its task is complicated by the need to prevent disorderly capital outflows. To stabilize the market, policymakers stuck with its support for the foreign-exchange market with a stronger-than-expected daily fixing on Wednesday.

The phenomenon also mirrors the broader Asian trend, where regional currencies have buckled under the weight of a stronger dollar as the Federal Reserve signals it’s in no rush to ease policy.

The central bank is sticking to the currency stability playbook, said Christopher Wong, strategist at Oversea-Chinese Banking Corp. But “with most Asian currencies depreciating, I won’t rule out the scenario that policymakers are taking the opportunity to let the yuan depreciate slightly” to be in line with others, he added.

Here are three charts that show the yuan’s stress in currency markets:

Testing Boundaries

The yuan traded less than 20 pips away from the lower daily trading limit against the dollar on Tuesday, the nearest it’s been to the band since November. The managed currency’s move is confined to 2% on either side of the daily reference rate, known as the fixing, set by the People’s Bank of China.

Investors were briefly blocked from some yuan swap transactions that implied the currency was outside the weak end of its fixed trading band against the dollar on Tuesday, according to traders.

Beyond Limit

The offshore yuan, which faces far fewer restrictions, has been trading at a weaker level than the lower end of the onshore trading band for eight sessions as of Tuesday. That’s the longest stretch since the People’s Bank of China made its yuan fixing regime more market oriented in August 2015.

Buying Protection

Bearish yuan sentiment is also picking up in the options market. A gauge of demand for one-month dollar-yuan call options over put options, a measure known as risk reversal, remains elevated after touching a seven-month high late last month.

(Updates with Wednesday’s PBOC fixing.)

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