New | Chinese yuan forward contracts hit 3-month peak as depreciation fears recede

Foreign investors are becoming more optimistic about the yuan’s performance this year, with forward contracts hitting a three-month-high on Thursday, after Premier Li Keqiang said a weaker currency would not be used as a tool to cushion the mainland’s economic slowdown.

The 12-month non-deliverable forward, which reflects offshore market expectations on the currency a year from now, fell by 0.28 per cent to 6.3896 against the US dollar. That is the strongest level since January 15.

The shift in market sentiment came after Li was quoted by the Financial Times on Thursday as saying Beijing would not resort to weakening the currency to shore up the mainland economy, which grew at is slowest pace since 2009 in the first quarter of the year.

The yuan slumped to two-year low in March as short-sellers bet a weaker exchange rate could be favoured by Beijing in order to help boost exports and shore up the economy. Although the forward contract is still pricing in a 1.6 per cent depreciation from Thursday’s level, that is much better than a month ago, when market players were expecting the yuan to depreciate by as much as 4.3 per cent in the next 12 months.

“The move (buying of the currency) started from onshore yesterday and the currency broke the 6.2 level against the US dollar, which had been holding since early April,” said Eddie Cheung, foreign exchange strategist at Standard Chartered Bank. “The magnitude of the move was quite strong … and it was driven by the market itself rather than the People’s Bank of China.”

In the spot market, the onshore yuan was trading at around 6.1968 against the US dollar, while the offshore yuan was trading at around 6.1936 against the greenback.

Thursday marked the first time the onshore renminbi posted year-to-date positive gains, recovering all the losses that occurred earlier this year. The onshore and offshore yuan have gained 0.15 per cent and 0.5 per cent respectively so far this year.