Renminbi slide back on global markets radar

LONDON: China´s weakening yuan is threatening a reprise of the storm that dominated world markets at the start of 2016, with Beijing´s ability to stamp on short-term speculators undermined by a broader consensus among major global investors that the currency will fall.

Hedge funds have been chastened by the squeeze on speculative investors orchestrated by Chinese authorities last January, but many of the underlying pressures on the currency remain and the early signs of tensions to come with U.S. President-elect Donald Trump has upped the ante.

Beijing´s ability to hold the currency stable over the next six months may not be in doubt but it will likely spend big again in doing so and, counter-intuitively, the lack of explicit speculation may make the pressure more difficult to defuse this time around.

A year ago, China spent the best part of six months fighting running battles to support the renminbi in the offshore market where the currency is allowed more room to move and which provides a leading indicator for its more tightly controlled onshore version.

Much of that pressure, relieved after Chinese New Year in February, stemmed from Chinese firms closing out "carry trades" based on higher domestic interest rates and the yuan gains that were a one way bet for most of the past decade.

As that effect waned, Beijing was able to quash a group of fund managers, some veterans of the 2008 big shorts of the U.S. mortgage market, who took George Soros-style bets in the options market on officials being forced into a one-off devaluation.

But this time, a number of measures suggest the weaker yuan trade is regarded as both a more certain bet and one supported by a more conservative group of long-term "real money" investors who tend to only jump on bigger consensus trends.

"Being bullish on the dollar as we are, we see the renminbi continuing to weaken next year," said Roger Hallam, who manages $260 billion in exposure as JPMorgan Asset Management´s head of currency management in London.

"We are at 6.90 (yuan per dollar) now.  If you look at the 3-month forward it says (we will reach) 7.0. So something closer to 7.25 next year is not unreasonable.