China's central bank is guiding the currency higher, but the country's investors seem unconvinced.
The People's Bank of China on Wednesday fixed the yuan at 6.8635 to the dollar, the strongest since Feb. 17, only to have it weaken to 6.88 within minutes of the 9:30 a.m. opening of trading. It ended slightly down from Tuesday's close, despite the stronger fix.
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The gap between the central bank's fix and where the currency then trades in the onshore market has widened in recent days. Wednesday's discount was the largest since January.
Such a gap "suggests that the onshore market is still not fully convinced that the Chinese yuan will remain strong," said Irene Cheung, a senior strategist for Asia at ANZ in Singapore, adding that the central bank's fix has been biased to yuan strength for a while.
There are several possible reasons traders are betting on a decline in the yuan, which has advanced nearly 1% against the dollar this year.
While China's growth accelerated in the first quarter, many analysts still expect it to slow later in the year--which could lead the central bank to let the yuan weaken in an effort to boost exports. The latest industrial-output and fixed-asset-investment data showed the economy may be losing steam.
And though investors have slashed their strong-dollar bets as they reconsider President Donald Trump's ability to deliver the tax cuts and fiscal stimulus promised during his election campaign, markets still expect more U.S. interest-rate increases this year. Without matching action by China, that could make the dollar more attractive to investors than the yuan.
The yuan doesn't trade freely within China. It is limited to a band extended 2% above and below the daily level set by the PBOC, which is based on where it ended the previous session and its movement against a basket of currencies.
Another sign that people inside China think the yuan should be weaker than the central bank does comes from China's UnionPay, an issuer of credit and debit cards. Its own exchange rate--which it says is based on transactions in its system, excluding charges or markups--puts the dollar at 6.9036 yuan, stronger than on the onshore market.
But in offshore markets, where the yuan trades more freely and overseas investors are more able to express their views, the idea that it should be weaker than the central bank's fix doesn't seem to have taken hold as strongly.
In the past market participants have often looked at the divergence between the yuan's offshore and onshore rates to get a sense of sentiment on the currency.
During the frenzy of early 2016, the yuan weakened much more offshore than onshore, underscoring foreigners' bearishness on China. But that isn't the case now: The yuan is currently stronger offshore than onshore, as it has been for much of this year.
Write to Saumya Vaishampayan at firstname.lastname@example.org
(END) Dow Jones Newswires
May 17, 2017 08:28 ET (12:28 GMT)