SHANGHAI (Reuters) - Large state-run Chinese banks sold dollars in the yuan forwards market on Thursday, with their operations causing the future value of the yuan against the dollar to rise sharply, traders said.
There was little evidence of these banks, which are widely believed to often act on behalf of the People’s Bank of China, having intervened in the spot market, traders said, even though spot yuan extended its slow gains during the day, rising as far as 6.7778 per dollar compared to this week’s 13-month low of 6.8295.
The yuan’s steady 7-percent decline since April has been driven by worries over China’s simmering trade spat with the United States as well as rising U.S. market yields and a strengthening dollar.
While state banks have sporadically stepped into the market during the yuan’s decline from a peak of around 6.24 in late March, at times combining spot dollar sales with swaps to replenish those dollars, traders and analysts couldn’t explain the rationale for Thursday’s heavy activity in dollar-yuan swaps.
Ken Cheung, senior Asian FX strategist at Mizuho Bank in Hong Kong, said he suspected the action in the forwards market was linked to China’s current easy monetary policy bias. That meant it could not, unlike during the yuan’s steep decline in 2015 and 2016, keep selling dollars for yuan and thus depleting yuan balances in the banking system.
“But now China remains in a process of deleveraging, and inadequate liquidity could cause some defaults. I think China wants to have an independent monetary policy,” Cheung said.
Multiple traders said state-run banks were seen swapping large amounts of dollars for yuan in currency forwards.
Forward dollar selling by the big banks drove down one-year tenor of the dollar/yuan swap CNY1Y=CFXS to as low as 0 points on Thursday afternoon, compared with the previous close of 110 points. That effectively meant one-year yuan was priced at the same rate as spot yuan.
Traders said the sharp fall in swap points was justified by the shrinking interest rate spreads between U.S. and Chinese rates as the Fed sustains its policy tightening and China eases.
While lower swap costs could make it easier to short-sell the yuan, traders also said the authorities seemed to be tempering depreciation expectations by containing the price of yuan in the forwards market.
“It seems that China wants to weaken its currency to promote exports, while authorities are also afraid of reigniting capital outflows,” Cheung said.
The sharp moves in the forward market were also on account of poor liquidity as dollar buyers stayed on the sidelines, another trader said.
“You never know where central bank’s bottom line is, so no one dares to buy. Everyone is watching,” said a trader at a foreign bank in Shanghai.
The strong move in one-year dollar/yuan swaps gave rise to expectations that the swap curve could turn negative, meaning one-year dollars would be cheaper than spot dollars.
“Big banks were selling in the long end. And such offering has dragged the swap points lower,” said a trader at an Asian bank in Shanghai.
“It could fall further to negative, depending on when the big banks stop selling.”
Reporting by Winni Zhou and John Ruwitch; Writing by Vidya Ranganathan; Editing by Richard Borsuk