China's Resolve to Steady Yuan Gives Traders Chance to Profit

(Bloomberg) -- Yuan traders are stepping up their arbitrage of two types of forwards on the currency, to profit from a swelling gap between the spot rate and the central bank’s daily fix.

Investors are longing the yuan against the dollar using fixing-based non-deliverable forwards, and shorting the currency with deliverable forwards priced at the spot rate, according to three traders who asked not to be named as they aren’t allowed to comment publicly. They make a profit when the People’s Bank of China continues to issue steady fixing rates despite the falling yuan in the spot market.

The tactic has worked well so far. The spread between the two types of contracts expanded to the largest since early 2016 on Tuesday, and is expected to widen further.

The central bank has set its daily yuan fix at a level stronger than market watchers expected for 10 straight days, the longest stretch since June, even as traders push the currency to new lows amid worsening trade tensions and slowing economic growth. The onshore yuan has closed weaker than the fixing -- which limits the currency’s moves by 2% on either side -- for all but one session over the past month.

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"The gap between the yuan’s deliverable and non-deliverable forwards will remain wide as long as the PBOC seeks to stabilize the fixing," said Gao Qi, a currency strategist at Scotiabank.

The onshore yuan fell 0.04% to 7.1748 per dollar as of 5:14 p.m. in Shanghai. The yuan’s one-month non-deliverable forwards outright stood at 7.1490, while the deliverable contracts were at 7.1839.

To contact the reporters on this story: Tian Chen in Hong Kong at tchen259@bloomberg.net;Ran Li in Beijing at rli279@bloomberg.net

To contact the editors responsible for this story: Sofia Horta e Costa at shortaecosta@bloomberg.net, Magdalene Fung, David Watkins

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