Yuan hedging costs near seven-year low as Beijing seen unlikely to allow sharp fall in currency

The cost to investors of protecting themselves from a falling Chinese yuan currency has reached its lowest level in seven years, as many see Beijing not allowing a sharp depreciation even as trade tensions increase.

If they allowed a sharp fall in the currency, Chinese authorities would face capital outflows and further damage to the economy beyond that caused by trade tensions. As Beijing would not want this, investors see less need to buy offshore one-month forward yuan contracts, widely used to hedge against the onshore currency.

“Even if Chinese policymakers see a weaker yuan as helpful to ease financial conditions and cushion a slowing economy when external demand faces new challenges, we do not believe it is in China’s interests to weaponise its currency,” said Claudio Piron, emerging Asia fixed income and currency strategist at Bank of America Merrill Lynch.

Offshore yuan via one-month forward points dropped to 10 points early on Friday, marking the lowest level since October 2011 on an intra-day basis. It has retraced slightly to around 27.92 points thereafter.

Yuan forward points are added to or subtracted from the spot rate, reflecting appreciation or depreciation expectations as well as interest rates compared to the US currency and interest rates.

For Friday’s one-month yuan forward contract, with its spot price trading at 6.6461 plus 27.92, the forward rate would be 6.6433. The three-month yuan forward contract was at 150 points, down from an average of 326 points in the past year.