Yuan Fixing Near Post-Devaluation Low Is Bearish Sign to SocGen

(Bloomberg) -- China’s reference rate for the yuan is approaching the weakest level since an August devaluation and a breach of the low would likely fuel speculation that policy makers are prepared to let the currency depreciate, according to Societe Generale SA.

The People’s Bank of China on Aug. 11 surprised global investors by switching to a more market-driven fixing regime that sparked the yuan’s steepest plunge in two decades. It set the currency’s reference rate at 6.3896 per dollar on Thursday, about 0.3 percent stronger than an Aug. 27 level that was the weakest in four years. The spot rate in Shanghai is allowed to trade a maximum 2 percent on either side of the fixing.

If the PBOC weakened the fixing to the August low, "it would be an important psychological signal for the market by reinforcing the view that renminbi depreciation is forthcoming," Jason Daw, head of Asia currency strategy at Societe Generale in Singapore, wrote in a note on Wednesday. The recent bout of yuan declines "could indicate the authorities being content with additional short-term depreciation," he said.

The yuan will weaken to 6.8 per dollar by the end of next year in a gradual and controlled fashion, Daw predicted. The median estimate in a Bloomberg survey shows analysts foresee a 3.2 percent drop to 6.6.

A key risk for yuan bears is intervention by the PBOC, Daw said. The central bank has been propping up the exchange rate by selling dollars in both the onshore and offshore markets since the devaluation. The offshore intervention has been the more pronounced of late as the central bank seeks to narrow the gap between yuan exchange rates in Hong Kong and Shanghai amid a push for reserve-currency status at the International Monetary Fund.

Bank of America Corp. says central bank intervention to support the yuan will be pared back once the currency has won admission to the IMF’s Special Drawing Rights at a review scheduled for Monday. David Tepper, the billionaire owner of Appaloosa Management who is based in Short Hills, New Jersey, said last week a devaluation may be pending as the currency is massively overvalued.

"While available evidence suggests that the PBOC has taken a hands-off approach in preventing depreciation, intervention risks are significant if market positioning becomes too one- sided," said Societe Generale’s Daw.

To contact the reporter on this story: Fion Li in Hong Kong at fli59@bloomberg.net To contact the editors responsible for this story: James Regan at jregan19@bloomberg.net Simon Harvey, Robin Ganguly