China unleashes yuan bears, but can it cage them again?

Sun May 4, 2014 6:43pm EDT
 
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By Pete Sweeney and Lu Jianxin

SHANGHAI (Reuters) - Beijing's attack on yuan speculators has proven extraordinarily successful, so much so that traders no longer see it as a short-term intervention but a deeper market shift that has now gained a self-reinforcing momentum.

That's bad news for speculators still holding onto bullish yuan positions. And for the People's Bank of China (PBOC), the risk is it has unleashed bearish forces it may not be able to rein in, souring enthusiasm for the yuan and complicating the push to increase the international adoption of the currency.

"The market had expected the yuan's weakness to last no more than a few weeks, but the PBOC has now sent clear signals that it is the central bank, not the market, that will decide when the yuan's weakness will end," said a trader at a European bank in Shanghai.

"With the PBOC giving no signal that it intends to do so, corporates have become alarmed, and many are now building dollar positions to hedge."

Since the central bank started aggressively pushing the currency lower in February, to shake the market out the view the yuan was a one-way bet, it has fallen more than 3 percent and more than unwound its gains of 2013.

On Wednesday, it touched an 18-month low of 6.2676 per dollar. Markets were closed for holidays on Thursday and Friday.

For its part, the PBOC has continued to set the daily midpoint rate near seven-month lows, which traders say signals it is still happy with current levels.

Initially, traders said the PBOC had to play hard ball to convince them it was serious -- especially since its last attempt to pull back the yuan in late 2012 was widely considered a failure.   Continued...

 
A clerk arranges bundles of 100 Chinese yuan banknotes at a branch of China Merchants Bank in Hefei, Anhui province March 17, 2014. REUTERS/Stringer