It would appear that the widening of the daily trading bands (we discussed last night) are having a directional effect on USDCNY as the devaluation continues on the back of forced carry-trade unwinds. At 6.19, CNY is its weakest in 11 months (2.5% weaker than its lows in January) and the last 2 months have seen by far the biggest weakening in the currency on record. This ‘implied’ easing is modestly supporting the stock market and copper for now (though we suspect that is more spillover from risk-on squeezes post-Ukraine). While Goldman and BofA are adamant that widening the bands will not mean a change in trend overall, it seems clear that hot money is outflowing and driving a trend change anyway as corporate bond prices are not rising and home-price appreciation is slowing in the major cities.
USDCNY drops 100 pips to 6.19 – lowest in 11 months…
China’s decision to squeeze speculators out of its currency is causing pain for local companies and individual investors.
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China is attempting to reduce the amount of money flowing into the country from foreign investors looking to profit on a rise in the yuan. The government sees this cash as inflating asset prices and making the economy more vulnerable to financial shocks.
But the currency’s decline is having a broader impact, particularly on Chinese companies that had placed bets on an appreciating yuan, traders and analysts say.
These companies have placed such bets in recent years to guarantee steady revenue from exports as the currency’s value climbed steadily against the dollar.
Many companies borrow money to make these trades, magnifying gains when the yuan rises but opening them up to big losses if the currency falls.
With the yuan down 2% against the dollar this year, more of the bets are losing money, said Geoff Kendrick, head of Asian currencies and rates at Morgan Stanley.
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He estimates that paper losses on one popular way companies hedge their yuan exposure and individual investors bet on the yuan, through what is known as target redemption-forward products, have hit $2.3 billion, on contracts valued at $150 billion.
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“In the past, when the [yuan] had a clear one-way trend, it used to be really easy for corporates. But now, with two-way volatility it becomes very tricky for them to manage,” he said. “It’s going to be a very different market from here.”
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For now, most of the losses remain on paper because investors and companies haven’t yet sold their positions. However, banks are asking both corporate and individual clients with losing bets to pony up more collateral, traders in Hong Kong say. Banks also are advising companies to restructure their investments around weaker levels for the yuan, a cheaper alternative than completely unwinding millions of dollars of the products, which were originally designed to help companies hedge against gains in the yuan.
While the recent declines likely aren’t big enough to trigger a stampede out of the yuan, the added volatility in the exchange rate may give some investors pause.
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“If the currency appreciation is no slam dunk anymore…part of the attraction of owning Chinese equities and bonds is being erased,” said Greg Anderson, global head of foreign-exchange strategy for BMO Capital Markets, a subsidiary of BMO Financial Group. “The result will probably be less foreign portfolio investment in China.”
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“Some hedge funds are closing up positions,”… Even a small drop in the yuan could trigger big losses. Many investors are vulnerable if the yuan weakens to 6.20 to the dollar
And with home price appreciation slowing, perhaps thinsga re moving a little too fast for the PBOC to manage?
via Zero Hedge http://ift.tt/1g4B1G6 Tyler Durden