Sunday, January 16

Whatever happens to Evergrande, no one wants to shorten the Yuan

The public collapse of China Evergrande Group is shaking markets around the world, but analysts are confident that the country’s own currency will be saved.

The yuan has hardly been the subject of brief recommendations. Even among bearish analysts, few suggest betting directly against it amid growing trade surpluses, negative carry from short positions, and possible Banco Popular intervention in the event of the Evergrande collapse.

“The Evergrande episode is likely a short-term sentiment hit for CNY FX rather than an instigator of lasting currency weakness,” JPMorgan Chase & Co. analyst Tiffany Wang wrote last week.

That might seem counterintuitive. Evergrande has debts of more than $ 300 billion, equivalent to more than 2% of China’s gross domestic product, not to mention its potential impact on suppliers in local markets and industries. However, although the yuan abroad lost 0.9% in the four days before the company’s first interest payment deadline, it has since recovered and the one-month implied volatility has also returned to low. levels from early September.

One of the main reasons for the renewed stability of the yuan is China’s central bank, which is likely to step in given any sudden depreciation, Morgan Stanley analysts led by chief Asia economist Chetan Ahya wrote in a research note. published on September 23.

Trade and tensions

Morgan Stanley recommends going long on the Chinese currency, along with short positions on the euro and the Taiwan dollar, as “underlying flows remain healthy for the CNY.” The euro has lost 1.8% against the yuan in the third quarter, while the Taiwan dollar has gained around 0.4%.

The release of a top Huawei Technologies Co. executive last Friday also rekindled hopes of easing trade tensions between the United States and China, which could further help the yuan. JPMorgan’s Wang recommends positioning yourself through options for potential US tariff reviews on selected Chinese goods. While the timing and outcome of the rate developments are highly uncertain, “waiting for such news is positive even if there is no final delivery,” according to a note dated September 16.

JPMorgan prefers a two-month CNH call with a 6.38 strike price, along with a 6.30 reverse knockout to lower cost. The trade is essentially a bet that the yuan will appreciate beyond 6.38 to the dollar, but will not exceed 6.30, if Washington eases some of its tariffs on Chinese goods. Year-to-date highs for the yuan on land and abroad were reached on May 31 at about 6.35 per dollar.

Bearish views

Still, investors will have to act carefully.

“We can’t completely rule out a more complicated situation” with Evergrande, said Standard Chartered’s Becky Liu. In that case, expect a modest depreciation of the yuan driven by a stronger dollar, higher confidence in risk and foreign investors selling Chinese assets.

Whether the company fails to pay its debts or not, Well Fargo’s Erik Nelson expects the yuan to fall to levels not seen since November 2020 over the next month, driven by capital outflows and slower economic growth. Even with this “out of consensus call”, as he puts it, he prefers a short AUD / CAD trade rather than a straight bet against the yuan.

Other strategists see more risk to the yuan from rising US yields than from Evergrande contagion. Iris Pang, ING’s Greater China Chief Economist, expects a slight depreciation until the end of the year, when the US starts to decline. Cui Li of CCB International Securities said he believes Evergrande’s impact on the currency will be “quite small,” but a bouncing dollar could put downward pressure on the yuan.

Ten-year US Treasury yields rose above 1.56% during Tuesday’s New York session to the highest level since June 16. That has brought the US yield differential to the 7 per dollar level.

For most analysts, China’s trade surplus, which has risen more than 50% since the pandemic in 12 consecutive months, will help its currency weather this crisis.

“As the pandemic and global supply chain disruption continue, China’s trade surplus will keep the yuan high,” said Stephen Chiu of Bloomberg Intelligence.

© 2021 Bloomberg

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