China NDFs weaken sharply on devaluation jitters

The price of Chinese renminbi non-deliverable forwards (NDFs) spiked sharply against the dollar in active trading this week, following a cut in interest rates by the People's Bank of China (PBOC) last week and fears that China would be unable to avoid participating in a round of global currency devaluations, traders and economists said on Tuesday.

"The PBOC set the dollar/renminbi fix at 6.8527 [Tuesday morning] after 6.8505 yesterday," said Patrick Bennett, an economist at Société Générale in Hong Kong, in a daily report. China's central bank allows the domestic currency, which is not fully convertible, to trade within a narrow band each day. The PBOC cut its one-year lending rate by 108 basis points to 5.58% and the deposit rate by the same amount to 2.52% on November 25. The central bank has cut lending rates four times since September 15.

The six-month NDF made the biggest single-day move ever on Monday with a jump to 7.1600 from approximately 7.0000, and the one-year rose to 7.1285 from near 7.0450, Bennett said. The two contracts closed at 7.21 and 7.350 in Shanghai on Monday. The six-month NDF is trading at its highest level since October 2007 and the one-year NDF the highest since March 2007. As a result, the six-month and one-year NDF trading prices suggest a 4.4% and 5.9% depreciation of the renminbi against the greenback over those periods, respectively.

But Bennett does not believe depreciation is imminent. "While we have anticipated modest renminbi weakness would be priced in the NDFs due to pressure brought to bear from a competitiveness standpoint vis-à-vis other Asian currencies, we also believe outright depreciation will be resisted in favour of stability," he said. "The frenzy in the market regarding a potential change in forex policy is inappropriate. The spike higher in dollar/renminbi NDFs will present opportunities to enter relative value positions."

Exposure to the renminbi is often sought via NDFs, which are traded offshore by foreign dealers. China's domestic banks were sharply reprimanded by the country's supervisors for taking part in the NDF market two years ago, and, according to all foreign brokers contacted by Asia Risk, are not active in the market either directly or via a proxy.