Forex
Analysis-China’s cycle of dollar hoarding and weakening yuan gets vicious
SHANGHAI (Reuters) – Chinese businesses are hoarding dollars because they expect their own currency to weaken, and that in turn is exacerbating a slide in the yuan that has been driven by wobbly stock markets and feeble growth in the world’s second largest economy.
This feedback loop has been playing out for months in mainland currency markets, spurred on by the dollar’s rising yield. Foreign exchange deposits have climbed $53.7 billion since September to $832.6 billion, People’s Bank of China (PBOC) data shows.
Analysts say one of two things needs to happen to end the downward spiral: the Federal Reserve needs to make deep rate cuts or the yuan needs to hit some form of a trough. Both seem distant.
is at five-month lows and has lost 1.9% to the dollar this year as foreign investors pull more money out of its struggling markets. The currency has fallen from around 6.7 per dollar at the start of 2023 to around 7.24 currently, a 5% drop.
Regular inflows from domestic exporters have dried up, as businesses choose to park their dollars offshore in deposits that earn them 6%, compared to 1.5% on yuan deposits at home, and just wait for better exchange rates.
Yu Zuochen, a director at Goertek Inc, a Chinese electronic equipment maker, told a forum in the coastal city of Ningbo in late March that exporters were “winning by lying flat”, referring to their foreign exchange gains.
“The rate differential between U.S. and China is the most positive since 2007, and I think this powerful fundamental fact is enough to explain why Chinese exporters are reluctant to exchange dollars for yuan,” said Alvin Tan, head of Asia FX strategy at RBC Capital Markets. “This huge positive yield spread is not evaporating anytime soon.”
Even for companies that choose to bring their dollars home, while authorities have capped dollar deposit rates at major lenders at 2.8% since the middle of last year, there are other dollar-based wealth-management products that invest in overseas funds offering as much as 4.4% for 7-day investments.
Becky Liu, head of China macro strategy at Standard Chartered (OTC:), says a “confirmation of the Fed rate cut including a clearer dollar softening trend” could be a catalyst for corporates to convert their foreign exchange into yuan.
However, if the recent string of robust inflation and economic data in the United States is anything to go by, Fed rate cuts are being pushed out to the end of 2024 and the dollar is on a tear.
That means it is more likely the yuan may hit 7.3, at which level exporters may bring dollars home, sensing authorities may shield it at that level. It was roughly the trough for the yuan in both October 2022 and July 2023.
Several investment banks also predict the yuan will weaken to 7.3 per dollar by the third quarter of this year, but no further. A Shanghai-based banker who deals with corporates said some of his clients are now eyeing 7.3 as the level to sell their dollars.
TERMS OF TRADE
Chinese authorities do not seem unduly perturbed by this accumulation of dollars by businesses and citizens. State banks that normally act on behalf of the People’s Bank of China (PBOC) have been buying the yuan to stem its slide.
The PBOC did not respond to a Reuters request for comments.
Lemon Zhang, a strategist at Barclays, says exporters’ “reluctance to convert their FX receipts will likely continue for the next two quarters”.
She does not expect Chinese regulators to force exporters to settle their FX receipts, but says there could instead be smaller macro prudential or tax relief measures to encourage conversion.
Despite the decline, the yuan has not fallen as far and fast as currencies of some of its trading partners, notably Japan whose yen is down 9% this year, which has eroded China’s trade competitiveness and dented its trade surplus.
China’s goods trade surplus fell 11% to $593.9 billion in 2023 from a year earlier.
Analysts at China Construction Bank (OTC:) estimate the FX settlement ratio, which measures conversion of export receipts to yuan, was just 51% in February as corporate clients placed dollars in deposits.
Bank of America reported that investors had broadly sold off the US dollar last week, influenced by slightly positive economic indicators from the United States. The movement came in response to somewhat encouraging US inflation data and softer-than-expected retail sales figures.
According to the Bank of America, the sell-off of the US dollar was widespread, with real money investors now holding a slightly short position on the currency. Despite this trend, hedge funds’ long positions on the US dollar are still near the highest levels seen in the past five years.
In the foreign exchange markets, the Australian dollar (AUD) saw increased interest, with investors continuing to build their long positions. Conversely, short positions in the Swedish krona (SEK) and the New Zealand dollar (NZD) experienced a slight reduction.
Emerging market currencies also attracted attention, with buying activity focused particularly on regions such as Europe, the Middle East, and Africa (EMEA), as well as Asia. The Turkish lira (TRY) was highlighted as a currency where both hedge funds and emerging market investors increased their buying across the board.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.
By Stefano Rebaudo
(Reuters) -The dollar struggled for direction on Tuesday as investors stuck to their views for the expected timing of Federal Reserve monetary easing this year.
Ether was set for its largest two-day gain in nearly two years and bitcoin approached a record high on speculation about the outcome of applications for U.S. spot exchange-traded funds that would track the world’s second-biggest cryptocurrency.
The euro rose 0.12% to $1.0869.
Investors are awaiting Thursday’s data from the European Central Bank (ECB) negotiated wage tracker and the euro zone Purchasing Managers’ Index (PMI) which could provide further clues about the monetary cycle in the euro area.
Meanwhile, with little on the U.S. economic data calendar this week to guide the direction of the dollar, investors’ focus is turning to a slew of Federal Reserve speakers.
Several officials on Monday called for continued policy caution, even after data last week showed an easing in consumer price pressures in April.
Money markets are now pricing in 42 basis points (bps) of Fed rate cuts in 2024 — implying one 25 bps reduction and a 68% chance of a second move by December — from fully pricing in two cuts before recent hawkish comments from central bank officials.
They are betting on 63 bps of ECB rate cuts in 2024 from around 73 bps in mid-May.
Some analysts highlighted that Atlanta Fed President Raphael Bostic made dollar-positive remarks when he cautioned that the Fed’s benchmark rate would likely end up at a higher steady rate than in the past decade.
“We expect the dollar to weaken after the first rate cut (by the Fed), which markets now price in September, but we also see the risk of a delay in the monetary easing with the Fed making the first move in December,” said Athanasios Vamvakidis, global head of forex strategy at BofA.
Against a basket of currencies, the dollar dropped 0.08% at 104.52.
“We see risks towards far greater divergence favouring the Fed,” argued George Saravelos, global head of forex research at Deutsche Bank, after noting remarkable symmetry in monetary policy that is still priced in by markets.
“Combined with the status of high-yielding currency, this provides a powerful underpinning to USD strength,” he added.
On the data front, the focus will now be on the Personal Consumption Expenditures (PCE) price index report – the Fed’s preferred gauge of inflation – due on May 31.
In the cryptoverse, ether jumped 6.2% to $3.715.60 after hitting $3,730.70, its highest level since March 16. It surged nearly 14% in the previous session – its largest daily percentage gain since November 2022.
broke above the $70,000 level and was last trading 2% higher at $71,128. It hit its all-time high at $73,803.25 in March.
The jump in cryptocurrencies also has “to do with that core (U.S.) inflation data last week that’s boosted risk sentiment and obviously brought rate cuts back into play,” said Tony Sycamore, a market analyst at IG.
Against the yen, the dollar dropped 0.06% to 156.20, not far from its lowest in over 30 years at around 160.
Fears of intervention from Japanese authorities deterred traders from pushing the yen to new lows. However, the still-stark interest rate differentials between the U.S. and Japan maintained the appeal of the yen as a funding currency.
“Forex interventions can buy some time and temporarily avoid an excessive depreciation of the yen, but if the Fed starts cutting later than the markets currently expect, it can become challenging for Japanese authorities to keep the yen below certain levels,” BofA’s Vamvakidis argued.
The Canadian dollar was flat at $1.3627 ahead of inflation data later in the session.
“We have called for a Bank of Canada (BoC) rate cut in June for the past couple of months, and are expecting that to make the increasingly less attractive compared to other commodity currencies,” said Francesco Pesole strategist at ING.
The BoC would be willing to cut interest rates three times ahead of the Fed first move, according to a Reuters poll.
The New Zealand dollar fell 0.03% to $0.6103, before the Reserve Bank of New Zealand policy meeting which is expected to hold its key interest rate at 5.50% on Wednesday.
Bank of America (BofA) analysts provided insights into currency market trends, noting a significant rally in the pair last week. The surge was attributed to a subdued US Consumer Price Index (CPI) report. BofA’s signals indicate that the upward trend for the euro against the US dollar is likely to continue.
The bank’s analysis pointed to option flows that show a sustained demand for USD puts, suggesting that investors are betting on a weaker dollar. Additionally, BofA’s technical matrix revealed signals of a continuing downtrend for the USD when compared to major currencies such as the euro (EUR), the British pound (GBP), and the New Zealand dollar (NZD).
Despite the positive trend for the EURUSD, BofA cautioned that the momentum seen in the risk rally might not be as strong moving forward. The analysts observed that the (DXY), which measures the dollar’s strength against a basket of currencies, managed to close above its 200-day Simple Moving Average (SMA), an indication of a potential slowing in the dollar’s decline.
Furthermore, BofA’s economists have noted an absence of significant market-moving events from US economic data expected this week. Without new bearish catalysts for the USD, the currency’s downtrend might not maintain the same pace as observed last week.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.
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