London will be the arena between China’s central bank and hedge funds over yuan during Lunar New Year

Yuan stronger before long Chinese New Year break as George Soros and hedge funds seen raising intensity of attacks to short China, Hong Kong currency

PUBLISHED : Friday, 05 February, 2016, 6:36pm
UPDATED : Friday, 05 February, 2016, 6:36pm

The foreign exchange market in London will likely be the battlefield pitting central banks in China and Hong Kong against currency speculators and hedge fund managers such as billionaire George Soros who are shorting the yuan and Hong Kong dollar during the Lunar New Year holiday next week.

“There are increasing concerns in the currency options market of another round of intense weakness in the offshore yuan. The concern here is amplified by the fact that there will be no trading in onshore alongside onshore Chinese equity markets because of the week long Lunar New Year holidays. That leaves only the offshore yuan (CNH) for investors to hedge their currency risk,” said Heng Koon How,

senior currency strategist of Credit Suisse.

While the mainland Chinese onshore yuan market will close the whole week and Hong Kong will be shut from Monday to Wednesday for the Lunar New Year, many traders believe speculators may use the holiday period as an ideal time to launch their attacks.

Soros said previously a hard landing for China’s economy is “unavoidable” so he is shorting Asian currencies while another fund manager said the yuan should devalue by up to 40 per cent in three years.

The People’s Bank of China (PBOC) has insisted the yuan would only depreciate gradually while Hong Kong Monetary Authority (HKMA) Norman Chan Tak-lam has said it would monitor trading during the Lunar New Year period.

“This Sunday’s release of the January monthly update for China’s foreign reserves will be key. Market consensus seems to be for yet another monthly foreign reserve contraction of about US$100 billion.

This will imply that it will be increasingly difficult for PBOC to intervene aggressively to prevent currency weakness, without risking further FX reserve drawdowns,” Heng said.

Jasper Lo Cho-yan, director of Tung Shing Futures, said the battle would play out in London.

“London is the major offshore yuan market which is next to Hong Kong. If the hedge funds would like to do anything then, it would be in the London offshore yuan market,” Lo said.

“Usually, the central banks would squeeze interest rates up to burn the speculators to add to their cost to short sell the currency. Since the banking sector is closed in Hong Kong from Monday to Wednesday, such a strategy could not be used next week,” Lo said. “Instead, the PBOC and the HKMA may just give orders to their brokers in London, Singapore, New York and Japan to buy in any sell orders of the yuan and Hong Kong dollar and to put big buy orders to push the currencies up.”

The offshore yuan hit a one-month high at 6.5633 on Friday as the People’s Bank of China set the mid-price sharply higher for the second day in a row and traders wound up their short positions ahead of the Lunar New Year holiday.

The PBOC set the yuan mid-price against the US dollar at a fresh one-month high of 6.5314 on Friday, stronger by 105 basis points than Thursday’s fix when it was also stronger by 102 basis points from Wednesday’s level. It has risen 0.3 per cent in the two days.

Traders are allowed to trade 2 per cent above or below the mid-price set daily by the PBOC. The mid-price is taken as a type of a guidance and traders believe the PBOC setting the mid-price higher two days in a row indicates it would like to see the yuan trade stronger.

On a weekly basis, the currency reported a 0.24 per cent rise, which marks the fourth consecutive weekly advance, partially offsetting the 1.72 deprecation in the first week of this year.

Stephen Innes, a senior trader at OANDA, said the offshore yuan was so robust it traded stronger than the onshore yuan at one stage on Friday. He said Friday’s rise was due to some traders winding up their speculative short positions before the holiday.

“Of course, one has to take these moves with a grain of salt as they’re likely amplified by dwindling liquidity,” Innes said. “I think it is still a game on for the RMB and next week during thin liquidity offers an opportunity to make a big splash.”

The Hong Kong dollar rose for the third day in a row to trade at 7.7798 to the US dollar before easing to 7.7891 at 5 pm on Friday. On a weekly basis, the local currency weakened by 0.12 per cent after a sharp fall of 0.27 per cent on Tuesday.

The onshore yuan traded mainly by mainlanders remained flat at 6.5696 to the dollar at 5 pm, weaker by 0.09 per cent. The currency has risen 0.09 per cent this week, having also risen four straight weeks after a depreciation of 1.56 per cent in the first week of this year.