A sharp widening in the discount on yuan non-deliverable forwards late on Thursday and again early yesterday shows that the speculation about a revaluation of the yuan is now firmly back on the agenda.
The optimism can be expected to feed through to the Hong Kong dollar, analysts say.
The HK dollar has been under pressure in recent weeks as traders have been taking advantage of the higher interest rates they can obtain by switching into US dollars, and as recently as Wednesday the Hong Kong Monetary Authority had to step in to sell US dollars as demand outweighed supply.
In the early hours of yesterday, however, sentiment shifted and the HK dollar suddenly strengthened to HK$7.7967 against the greenback from $7.7999 the previous day. Traders and analysts were quick to put this down to the buying of 12-month yuan non-deliverable forwards, which had resulted in a widening of the discount to 2,450 pips from 2,100 earlier in the day - a level which suggests that the yuan would trade at 8.03 against the US dollar in one year's time if allowed to adjust upwards from its current level of 8.276.
'The forward [discount] has been grinding slowly, steadily wider since the beginning of August, which we attributed to fading fears of a hard landing in China,' said Tim Condon, the chief economist of ING Financial Markets. 'But yesterday's move was due to a rekindled interest in the yuan revaluation trade.'
A key trigger for the shift was the Asia-Pacific Economic Co-operation meeting in Santiago which brought the issue back to the political arena. In the end, Apec said only that it would welcome steps by member countries to move towards more flexible exchange, but coming on the back of similar comments specifically on China from the International Monetary Fund and amid talk that the Group of Seven leading industrialised nations will also bring up the issue at its October meeting, the market took it as a cue to reposition itself.