The
Chinese
yuan
could
be
the
next
currency
to
watch
after
the
dramatic
unwind
of
the
Japanese
yen
“carry
trade”
this
week,
according
to
market
experts.
A
wide
gap
between
U.S.
interest
rates
and
those
in
Japan
and
China
has
helped
fuel
the
carry
trades.
It’s
a
practice
in
which
investors
borrow
money
in
a
currency
from
a
country
with
low
interest
rates,
and
invest
in
currencies
with
higher
yields.
The
investors
then
profit
from
the
difference
in
rates,
but
can
lose
money
if
this
suddenly
changes.
In
the
last
few
weeks,
the
Bank
of
Japan’s
rate
hike
and
growing
expectations
for
U.S.
rate
cuts
pushed
investors
to
start
unwinding
carry
trades
in
the
yen.
The
yen
hit
38-year
lows
against
the
U.S.
dollar
in
July,
but
this
week
accelerated
a
swift
move
to
its
strongest
level
against
the
greenback
this
year.
“I
think
the
next
potential
carry
trade
to
unwind
could
be
the
yuan,”
Khoon
Goh,
head
of
Asia
research
at
ANZ
Bank,
told
CNBC’s
”
Squawk
Box
Asia
”
on
Wednesday,
adding
that
the
market
is
“starting
to
see
glimpses”
of
this.
Goh
was
formerly
a
senior
FX
strategist
at
the
bank.
The
offshore
yuan
—
which
is
traded
outside
of
China—
has
been
steadily
strengthening
against
the
U.S.
dollar
over
recent
days,
and
on
Monday
surged
to
its
strongest
level
in
2024,
falling
below
7.1.
It
was
last
trading
near
7.16.
Exporters
in
focus
Goh
emphasized
that
the
Chinese
government
keeps
a
tight
grip
on
its
currency,
but
argued
that
China’s
reliance
on
exports
could
still
result
in
a
significant
foreign
exchange
impact.
A
weaker
yuan
against
the
dollar
bolstered
Chinese
exports
in
the
first
half
of
the
year
.
China
reported
a
record-high
surplus
of
$99.05
billion
in
June,
according
to
data
going
back
to
1981
from
LSEG
Data
and
Analytics.
Goh
said
that
Asia’s
biggest
carry
trade
players
are
exporters,
especially
in
China.
“Look
in
Asia
and
China
…
They’ve
been
running
large
trade
surpluses.
And
yet
…
the
currency
has
continued
to
weaken,”
he
said.
“Because
they
were
playing
the
carry
trade,
they
can
get
much
better
return
on
interest
rate
returns,
by
putting
their
money
in
U.S.
dollars.”
According
to
Bruce
Pang,
chief
economist
and
head
of
research
for
Greater
China
at
JLL,
official
data
shows
that
Chinese
businesses
were
holding
the
most
U.S.
dollars
via
local
banks
in
June
since
December
2016.
But
with
the
U.S.
Federal
Reserve
expected
to
cut
rates
as
soon
as
next
month,
Chinese
exporters
could
decide
to
begin
converting
their
money
back
from
U.S.
dollars
—
potentially
causing
“big
moves”
in
some
Asian
currencies,
Goh
explained.
And
it’s
not
just
Chinese
exporters
who
are
involved
in
the
yuan
carry
trade.
Non-Chinese
investment
in
yuan-denominated
bonds
increased
by
nearly
$80
billion
in
the
first
half
of
the
year,
the
second-highest
rise
in
history,
according
to
official
data
cited
by
Pang.
He
said
the
interest
rate
gap
between
China
and
the
U.S.
and
weaker
growth
contributed
to
these
trends
in
the
first
half
of
the
year,
but
that
such
expectations
were
changing
as
the
U.S.
will
likely
cut
rates
and
China’s
economy
improves.
‘Positioning
worries’
Citi
also
warned
in
an
Aug.
6
note
that
the
Chinese
yuan
is
one
to
watch,
pointing
out
there
are
“positioning
worries”
surrounding
the
offshore
yuan
being
used
to
fund
the
carry
trade.
In
fact,
the
“most
popular
funder”
of
carry
trades
recently
has
likely
been
the
U.S.
dollar-offshore
yuan
pair
,
said
Citi.
“The
reason
is
that
CNH
was
also
swept
up
in
the
popular
Trump
trades,
where
the
threat
of
tariffs
was
supposed
to
lead
to
higher
USDCNH,”
the
bank
said.
The
dollar-yen
also
“sets
the
scene”
for
all
dollar-Asia
currencies
“to
some
extent,”
so
the
yen
unwinding
did
hurt
other
popular
carry
funders,
and
that
includes
the
yuan,
Citi
added.
Yen
vs.
yuan
However,
there
are
some
key
differences
between
the
Chinese
yuan
and
other
major
global
currencies.
Vishnu
Varathan,
managing
director
at
Mizuho,
pointed
out
to
CNBC
Pro
that
the
Chinese
currency
isn’t
as
liquid
or
global
as
the
yen.
The
yuan
steadily
weakened
against
the
U.S.
dollar
in
the first
half of
the
year,
amid
concerns
about
the
country’s
economy,
and
that
“goes
well
beyond
the
rates
(differential)
story,”
he
said.
“So
a
CNY-squeeze-triggered
carry
unwind
requires
geo-economic
risks
to
fade
as
well,”
Varathan
added.
And
while
the
Bank
of
Japan
might
be
raising
rates,
China’s
central
bank
remains
in
easing
mode
as
domestic
demand
has
been
sluggish.
That
stance
of
the
People’s
Bank
of
China
could
actually
encourage
more
yuan
carry
trades,
said
Yingrui
Wang,
China
emerging
economist
at
AXA
Investment
Managers.
She
did,
however,
point
out
the
near-term
strengthening
pressure
on
the
yuan
from
Chinese
exporters
who
have
accumulated
dollar
receipts
in
the
past
few
years
due
to
better
U.S.
yields.
“These
exporters
might
start
converting
their
dollar
receipts
and
providing
a
strong
boost
to
the
CNY,”
she
told
CNBC
Pro
.
And
while
the
yen
is
coming
off
its
weakest
levels
in
decades
against
the
dollar,
expectations
for
the
Chinese
yuan
are
more
muted.
Tao
Wang,
chief
China
economist
at
UBS
Investment
Bank,
said
in
a
note
Thursday
that
her
forecast
for
the
onshore
yuan
this
year
is
between
7.1
to
7.2
against
the
greenback,
from
current
levels
around
7.17.
