(Bloomberg) — Growing optimism toward the Chinese yuan is spreading into hedging activities, with the cost that mainland investors have to pay to guard against possible dollar losses falling to a three-year low.
Dollar‑yuan forwards imply investors can lock in a 12‑month settlement at around 6.86, roughly 1.7% below the current spot rate and near the lowest level since August 2022. The cost was as much as 4% in the middle of 2024, based on data compiled by Bloomberg.
The yuan has strengthened 5% over the past 12 months and breached the key threshold of 7 per dollar last month for the first time since May 2023. The rally has been driven by broad dollar weakness, China’s swelling trade surplus, an improving economy, the central bank’s willingness to allow its appreciation, and inflows ahead of Lunar New Year.
“There was a strong bullish yuan momentum trade into year-end and the fact is that bullish seasonality factors that had played a part in this could persist into the Spring Festival,” said Fiona Lim, a senior strategist at Malayan Banking Bhd. in Singapore. “Exporters may continue to hedge against yuan gains given the current sentiment.”
Demand from clients for forward foreign-exchange settlement and to buy dollar-yuan put options has risen since December at onshore banks, according to traders who asked not to be identified as they are not authorized to speak publicly. The banks then sell dollars in the spot market to square their derivative positions, which supports the yuan, they said.
Both forwards and options strategies can provide protection against declines in the dollar relative to the yuan.
The People’s Bank of China has contributed to the yuan’s gains in recent months through its steadily stronger daily fixings. That trajectory has given traders confidence that officials are amenable to further gains, which are believed to be helpful in appeasing trade partners.
The latest data from the currency market regulator show hedging activity has been picking up. A total of $109.8 billion of FX forward settlement contracts were signed at Chinese banks in the three months through November, the most since June 2023 on a rolling basis, according to China’s State Administration of Foreign Exchange.
Exporters are also stepping up their conversion of dollars into yuan, with onshore banks being net sellers of foreign exchange on behalf their clients for a ninth month in November, SAFE data also showed.
“There’s still plenty of pressure for the yuan to strengthen despite its recent gains,” Thomas Mathews, head of Asia Pacific markets at Capital Economics in London, wrote in a client note published last week.
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