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The Chinese-currency rumour mill is “churning overtime” traders noted on Friday, as forward renminbi contracts headed towards their biggest weekly gain in two months.
Citi traders said on Friday morning that much speculation about a weekend (upwards) revaluation of the reniminbi brought more heavy selling interest.
The point, according to Citi, is that “no one is certain when their wish [for a revaluation] will be granted by Chinese authorities” but, “nobody can afford to NOT have a position if there is a GO for the reval”.
Indeed, late Thursday Ashraf Laidi, chief market strategist at CMC Markets, mentioned growing speculation that a rise in Chinese interest rates could come as early as Friday, saying: "With 100 basis points of cumulative increase in banks' reserve requirements, this may be the time for the PBoC to pass the onus on to the borrowers".
Meanwhile, added Citi, various strategies are being mulled over to offset the negative carry on the short dollar trade, “but traders still feel that it’s a small price to pay for a potential big gain”.
Later in Asia’s afternoon on Friday, a fresh rumour took hold that the People’s Bank of China had decided to raise its 1-year deposit rate by 27bps from 2.25 per cent to 2.52 per cent and 1-year loan rates from 5.31 to 5.58 per cent. The word in the markets is that the implementation date will be on Monday, March 15.
Yes, it “defies logic”, Citi traders note — not least because Chinese central bank officials have “kept on underplaying the inflationary pressures” and a rate hike without currency revaluation would mean more speculative inflows.
Therefore, the market is concluding, we could possibly see both a revaluation and a rate hike this weekend. For instance, one analyst told Bloomberg that:
"The data is strong so the authorities should be more comfortable to resume appreciation when they need to," said Sebastien Barbe, head of emerging-markets research at Credit Agricole CIB in Hong Kong. " Inflation numbers were stronger than expected, so we'd need more measures to damp domestic prices and part of this is a stronger yuan."
Related links: Reining in the Chinese inflation dragon - FT Alphaville Beijing’s light touch under strain - FTAlphaville Roach: Pooh-pooh to Chinese bubbles - FT Alphaville Overheating China reaction – FTAlphaville
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