Yuan onshore forwards extend slide but NDFs drift
* Yuan onshore forwards see fresh losses, NDFs little changed
* Banks liquidate some risky positions in arbitrage trades
* Liquidation not related to yuan policy change
* Eyes still on possible yuan appreciation around mid-May
* Onshore-offshore arbitrage window remains closed
By Lu Jianxin and Karen Yeung
SHANGHAI, April 26 (Reuters) - Onshore dollar/yuan forwards extended their slide on Monday, with one-year contracts tumbling to their lowest levels since mid-2008 as banks and investors rushed to unwind trades betting between the onshore and offshore markets.
While the sharp drop implied greater appreciation of the yuan in the future, traders said the move was due to market players being forced to close such arbitrage trades rather than a view that Beijing was about to unshackle the yuan's peg to the U.S. dollar.
Reflecting that the move was driven by onshore activity, the spread between onshore and offshore forwards collapsed to its smallest in eight months and is down more than 700 pips in less than a week.
Yuan non-deliverable forwards were little changed despite the volatility in the onshore market -- suggesting to dealers that the sharp move was not tied to a shift in expectations about when the yuan may start climbing or whether Beijing will conduct a one-off revaluation.
The rush to unload dollar/yuan forwards has helped lead to a severe shortage of dollars in the money market.
"Arbitrage-related dollar demand has helped caused a dollar shortfall in the onshore market, although there are other factors that cause a liquidity squeeze," said a dealer at a major Chinese commercial bank in Shenzhen, citing factors including worries over an official clampdown on short-term debt.
Reuters reported on Friday that China's foreign exchange regulator was considering cutting short-term foreign debt quotas for some commercial banks as it seeks to curb speculative inflows into China betting on yuan appreciation. [ID:nTOE63M06H]
In a typical arbitrage deal, Chinese banks buy dollars in onshore forwards and then do a reverse contract in the NDF market to sell dollars for yuan, cashing in on discrepancies between implied interest rates in the two markets.
But the collapse of those rate differentials in the two markets has forced banks and other players to unwind those arbitrage positions, causing the dollar-funding squeeze that has driven implied dollar rates higher.
One-year dollar/yuan onshore forwards fell to 6.6323 bid late on Monday, their lowest since mid-2008 and down from Friday's intraday low of 6.6450.
The move theoretically implied markets see the yuan appreciating 2.93 percent over the next 12 months, up from 2.73 percent on Friday, as measured from the Chinese central bank's mid-point for the currency.
A fall in forwards typically reflects speculation of a bigger potential for the local currency to appreciate in future, or vice versa, but this is not really the case for the onshore market.
Fluctuations in onshore forwards usually reflect spreads between Chinese and U.S. interest rates and the onshore dollar supply situation, in other words, actual money demand.
So the latest spate of onshore forward falls do not imply the Chinese market is now forecasting more yuan appreciation, but rather a dollar liquidity squeeze in the onshore market.
The shortfall, however, saw dollar funding costs implied by one-year onshore dollar/yuan swaps jumping 47 basis points on Monday to 4.63 percent -- their highest since September 2008.
Non-deliverable forwards (NDFs) moved in a relatively narrow range, suggesting offshore expectations of yuan appreciation have somehow stabilised after the financial leaders from the Group of 20 developed and emerging economies skated over China's yuan/dollar peg in their meeting late last week.
That could be a sign that policymakers expect China to allow the yuan to resume its rise in its own time. [ID:nN23188650mg]
One-year dollar/yuan NDFs moved in a range of 6.5975 to 6.6175, compared with Friday's close of 6.6080, implying 12-month yuan appreciation of 3.16 to 3.47 percent compared with Friday's 3.31 percent.
Some traders interpreted the G20's silence over the yuan as paving the way for China to allow the yuan to resume its rise around mid-May, when China and the United States hold their Strategic and Economic Dialogue, an annual meeting to discuss broad economic, foreign policy and security concerns.
"The market thinks China will re-evaluate whether the yuan is at an appropriate level around mid-May," said a trader at a major Chinese bank in Shanghai.
The spread between one-year onshore and offshore forwards fell to 350 pips late on Monday, down from Friday's 590 pips.
The window for onshore-offshore forward arbitrage, which dealers say typically needs 1,000 pips, has been closed since early last week due to a plunge in onshore forwards.
Spot yuan closed at 6.8266 from Friday's close of 6.8275 after the Chinese central bank set the yuan's mid-point a pip higher at 6.8263 from Friday's 6.8264. (Editing by Eric Burroughs and Kim Coghill)
2010-04-26 13:10:48
* Yuan onshore forwards see fresh losses, NDFs little changed
* Banks liquidate some risky positions in arbitrage trades
* Liquidation not related to yuan policy change
* Eyes still on possible yuan appreciation around mid-May
* Onshore-offshore arbitrage window remains closed
By Lu Jianxin and Karen Yeung
SHANGHAI, April 26 (Reuters) - Onshore dollar/yuan forwards extended their slide on Monday, with one-year contracts tumbling to their lowest levels since mid-2008 as banks and investors rushed to unwind trades betting between the onshore and offshore markets.
While the sharp drop implied greater appreciation of the yuan
Reflecting that the move was driven by onshore activity, the spread between onshore and offshore forwards collapsed to its smallest in eight months and is down more than 700 pips in less than a week.
Yuan non-deliverable forwards were little changed despite the volatility in the onshore market -- suggesting to dealers that the sharp move was not tied to a shift in expectations about when the yuan may start climbing or whether Beijing will conduct a one-off revaluation.
The rush to unload dollar/yuan forwards has helped lead to a severe shortage of dollars in the money market.
"Arbitrage-related dollar demand has helped caused a dollar shortfall in the onshore market, although there are other factors that cause a liquidity squeeze," said a dealer at a major Chinese commercial bank in Shenzhen, citing factors including worries over an official clampdown on short-term debt.
Reuters reported on Friday that China's foreign exchange regulator was considering cutting short-term foreign debt quotas for some commercial banks as it seeks to curb speculative inflows into China betting on yuan appreciation. [ID:nTOE63M06H]
In a typical arbitrage deal, Chinese banks buy dollars in onshore forwards and then do a reverse contract in the NDF market to sell dollars for yuan, cashing in on discrepancies between implied interest rates in the two markets.
But the collapse of those rate differentials in the two markets has forced banks and other players to unwind those arbitrage positions, causing the dollar-funding squeeze that has driven implied dollar rates higher.
One-year dollar/yuan onshore forwards
The move theoretically implied markets see the yuan appreciating 2.93 percent over the next 12 months, up from 2.73 percent on Friday, as measured from the Chinese central bank's mid-point for the currency.
A fall in forwards typically reflects speculation of a bigger potential for the local currency to appreciate in future, or vice versa, but this is not really the case for the onshore market.
Fluctuations in onshore forwards usually reflect spreads between Chinese and U.S. interest rates and the onshore dollar supply situation, in other words, actual money demand.
So the latest spate of onshore forward falls do not imply the Chinese market is now forecasting more yuan appreciation, but rather a dollar liquidity squeeze in the onshore market.
The shortfall, however, saw dollar funding costs implied by one-year onshore dollar/yuan swaps
Non-deliverable forwards (NDFs) moved in a relatively narrow range, suggesting offshore expectations of yuan appreciation have somehow stabilised after the financial leaders from the Group of 20 developed and emerging economies skated over China's yuan/dollar peg in their meeting late last week.
That could be a sign that policymakers expect China to allow the yuan to resume its rise in its own time. [ID:nN23188650mg]
One-year dollar/yuan NDFs
Some traders interpreted the G20's silence over the yuan as paving the way for China to allow the yuan to resume its rise around mid-May, when China and the United States hold their Strategic and Economic Dialogue, an annual meeting to discuss broad economic, foreign policy and security concerns.
"The market thinks China will re-evaluate whether the yuan is at an appropriate level around mid-May," said a trader at a major Chinese bank in Shanghai.
The spread between one-year onshore and offshore forwards fell to 350 pips late on Monday, down from Friday's 590 pips.
The window for onshore-offshore forward arbitrage, which dealers say typically needs 1,000 pips, has been closed since early last week due to a plunge in onshore forwards.
Spot yuan
2010-04-26 13:10:48