After its worst quarter on record, the yuan may finally be headed for a break.
The People’s Bank of China (PBoC) will hit the brakes on depreciation to avoid sparking global volatility and exacerbating capital outflows, according to Svenska Handelsbanken, the currency’s top forecaster. The case for an end to yuan weakness is supported by its impending entry into the International Monetary Fund’s reserves basket in October as well as a dovish Federal Reserve spurring dollar declines, says JPMorgan Asset Management.
The yuan has posted Asia’s biggest decline this year on speculation policy makers were guiding depreciation against both the greenback and a trade-weighted gauge as they looked to boost exports and revive economic expansion. Things may finally be turning around, with data from gross domestic product to retail sales spurring optimism that growth will steady and that the monetary authority will refrain from aggressive easing.
“They will take a breather now and celebrate that they have managed to depreciate the yuan without creating too much noise and without creating too much capital outflows,” said Bjarke Roed-Frederiksen, a Copenhagen-based economist at Handelsbanken, the most accurate yuan forecaster tracked by Bloomberg over the last four quarters.
There are already signs of the weakness abating. The yuan briefly erased its losses against the dollar last week, halting a five-week run of losses, before a late resurgence in the dollar. A Bloomberg replica of the 13-currency CFETS RMB Index advanced for the first time since May in the five days through July 15. The currency’s run of losses this time round has avoided sparking the sort of market panic seen in August and January, when yuan weakness roiled global markets and spurred speculative bets against the exchange rate.
This is because China’s central bank has improved its communication with markets, provided clarity on how it sets its daily reference rate and taken steps to prevent a downward spiral of depreciation and capital outflows. The PBoC also probably understands that it has pushed the envelope far enough for now, according to Roed-Frederiksen.
“I think they realised they probably shouldn’t move any further for the moment,” he said, adding that the PBoC may opt for slight depreciation again in the fourth quarter to finish the year at 6.8 a dollar. “They are satisfied with what they have achieved for now and they are - or at least should be - afraid global investors’ focus will return and also that domestic investors will start worrying again about depreciation and thus increase capital outflows.”
An estimated $1tn left China last year as the yuan’s abrupt devaluation in August prompted firms to repay their foreign debt and local investors to pour cash into overseas assets. As the yuan stabilised, monthly outflows slowed to an average $68.6bn through May this year, compared with $113bn in the second half of 2015. Foreign-exchange reserves unexpectedly increased in June, a sign outflows are slowing.
There are some fundamental reasons for the yuan to stabilise, according to Ji Mo, Hong Kong-based chief economist for Asia ex-Japan at Amundi. She estimates that the foreign- currency debt of Chinese companies has dropped to about $500bn from $1.1tn at end-2015, reducing repayment pressures.
Speculation that authorities were curbing declines in the exchange rate resurfaced last week when the overnight yuan interbank rate in Hong Kong jumped to a five-month high. The yuan index’s gain last week indicates that the PBoC may have intervened to stem depreciation, said Zhou Hao, an economist at Commerzbank in Singapore.
The yuan rose 0.16% on Tuesday, the most in more than a week, to trade at 6.6909 against the greenback, after weakening beyond 6.7 for the first time since November 2010 in the previous session as better-than-expected US economic data buoyed the dollar. The Chinese currency will end the third quarter at 6.7 and the year at 6.795, according to median estimates in a Bloomberg survey of analysts conducted in the past week. The official CFETS index will drop slightly to 93.5 at year-end from 94.38 last Friday, the median of 13 estimates in the same survey showed.
“The current depreciation should probably come to a close in the near term,” Tai Hui, chief Asia market strategist at JPMorgan Asset Management, said in a briefing in Hong Kong. “The authorities want to maintain domestic investor confidence. We are running up to the Group of 20 meeting in September and SDR inclusion in October and typically ahead of these key events, the currency is kept relatively stable - again, to give people confidence.”


Yuan banknotes are placed on a staff’s table in a bank in China. The yuan has posted Asia’s biggest decline this year on speculation policy makers were guiding 
depreciation against both the greenback and a trade-weighted gauge as they looked to boost exports and revive economic expansion.


Sensex climbs for second day; rupee weakens to 67.20


Bloomberg
Mumbai




Indian stocks rose for a second day, sending at least four companies in the benchmark gauge to a record close, as overseas investors extended their purchases of local shares amid gains in global equities.
The S&P BSE Sensex closes 0.46%, or 128.27 points, higher at 27,915.89, while the Nifty 50 closes 0.44%, or 37.30 points, higher at 8,565.85.
Coal India, the world’s biggest miner of the fuel, was the top gainer on the S&P BSE Sensex. HDFC Bank, the most valuable lender, climbed to a record before its quarterly earnings today. Power Grid Corp and motorcycle makers Hero MotoCorp and Bajaj Auto rallied to all-time highs. Indian Oil Corp, Hindustan Petroleum Corp and Bharat Petroleum Corp, the nation’s largest refiners, also increased to records.
Foreigners have bought $847mn of stocks since July 1, adding to four straight months of inflows that have lifted the Sensex 22% from a low in February amid strong rain after back-to-back droughts and signs of recovery in company earnings. Global equities added more than $4.5tn in value in the past three weeks amid expectations policy makers will step up stimulus to stem the economic fallout arising from the UK shock decision to leave the European Union.
“One has to see how global growth pans out, but the domestic side is where things are looking better,” Mahesh Patil, co-chief investment officer at Mumbai-based Birla Sunlife Asset Management Co, which has $22bn in assets, said in an interview to Bloomberg TV India. “The monsoon’s impact will be felt in the second half, while demand in core sectors like cement and oil has been looking better for the past few months.”
Rainfall in the June-September monsoon season, which accounts for more than 70% of India’s annual showers, was 2% above normal as of Tuesday. Fuel demand rose 11% in the year ended March, the fastest pace since at least fiscal 2001, while air travel expanded 23% in the first five months of this year, official data show.
Overseas funds bought $106mn of shares on Tuesday, an eighth day of net purchases. The inflows have pushed the Sensex’s valuation to a 16-month high, leaving share prices with little room to climb further if more companies report earnings that miss estimates. The gauge fell on Friday and Monday after Infosys, the second-biggest software maker, and Hindustan Unilever (HUL), the largest consumer products company, posted earnings that disappointed investors.
Wipro, the third-biggest software maker, dropped for a fifth day after its first-quarter profit and revenue missed forecasts. Earnings came after trading ended on Tuesday. HDFC Bank, ITC  and Bajaj Auto are due to announce results this week.
“Despite the multiples being high, there’s still some steam left in the rally going by the inflows,” Abhimanyu Sofat, founder of AdviseSure Ventures in Mumbai, said by phone. “We have a cyclical upturn and a good monsoon has added to the cheer by reducing the fear of food inflation flaring up.” He is advising clients to buy shares of infrastructure finance, road builders and energy companies.
Meanwhile the rupee yesterday weakened against the US dollar, tracking the fall in the Asian currencies market. The home currency closed at 67.20, down 0.13% from its previous close of 67.11. The local currency opened at 67.15 a dollar.
Asian currencies dropped marginally as investors are unlikely to have huge positions before the US Federal Reserve and Bank of Japan meetings next week, according to a Bloomberg report.
Malaysian ringgit was down 0.457%, South Korean won 0.453%, Philippines peso 0.435%, Japanese yen 0.385%, Singapore dollar 0.383%, Indonesian rupiah 0.175% and Taiwan dollar 0.08%. However, China offshore spot was up 0.42% and China renminbi 0.29%.
Foreign institutional investors (FIIs) have turned net buyers of Indian debt as hopes of a normal monsoon and a dovish central bank governor have renewed expectations of further rate cuts.
The fall in global bond yield prices to multi-year low and the probability that the Fed may delay the rate hike due to the Brexit on the impact worries also boosted sentiment.


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