Currency strategists from Barclays Plc to Deutsche Bank AG are telling investors to sell the yuan, this year’s best-performing emerging-market currency, as growth slows in the world’s second-largest economy and inflows wane.
Policy makers will widen the yuan’s trading band, damping the one-way bet on yuan gains, Barclays analysts led by Igor Arsenin said in a June 13 report. Deutsche Bank analysts wrote two days earlier that the yuan carry trade will probably unwind as Treasury yields rise. The yuan will start weakening after the central bank set its fixing at a record high yesterday, according to Amer Bisat, a money manager at Traxis Partners LP, the $1.2 billion hedge fund started by Barton Biggs.
China has used a stronger exchange rate to help curb credit expansion, Bisat said in an interview yesterday in New York. Total lending in China climbed by a record 2.5 trillion yuan ($408 billion) in March, government data showed, generating concern that some loans may turn sour as banks loosen standards.
“We are not far away from the point where they can take their foot off the brake,” said Bisat, a former International Monetary Fund economist. “Chances are they would loosen policies. It’s tough for me to see them strengthening the fixing any further from here.”
The yuan’s fixing was set 0.09% weaker at 6.1651 per dollar today. The currency, which is allowed to trade a maximum 1% either side of that level, declined 0.06% to close at 6.1285 in Shanghai, according to China Foreign Exchange Trade System. It has climbed 1.7% against the greenback this year, the best performance among 24 emerging-market currencies tracked by Bloomberg.
One-month non-deliverable forwards fell 0.2% to 6.1840 as of 9:20 a.m. in New York, data compiled by Bloomberg showed. That’s the biggest one-day drop since May 10.
Barclays analysts advised their clients to buy one-month call options on the dollar against the yuan, predicting the Chinese currency will weaken to 6.223 per dollar in overseas trading. The yuan will drop 1.1% to 6.2 in the offshore market as the slowing economy leads to currency depreciation in line with Asian peers, Westpac Banking Corp. analysts led by Jonathan Cavenagh wrote in a June 7 report.
Capital inflows are slowing as China’s regulators demand lenders curb foreign-currency loans on concern companies may have exaggerated shipments to facilitate carry trades, in which foreign investors seek higher yields abroad funded by borrowing in countries with lower rates of interest. Yuan positions at domestic lenders from foreign-exchange transactions, a gauge of capital inflows, rose 67 billion yuan in May, the smallest gain since November, data released by the People’s Bank of China on June 14 showed.