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China's will to steady yuan gives traders a window for profits
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 (PBOC) 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 per cent on either side - for all but one session over the past month.
"The gap between the yuan's deliverable and non-deliverable forwards will remain wide as long as the PBOC seeks to stabilise the fixing," said Gao Qi, a currency strategist at Scotiabank.
The onshore yuan fell 0.15 per cent to 7.1824 per dollar as of 1.48pm in Shanghai. Its one-month non-deliverable forwards outright stood at 7.1610, while the deliverable contracts were at 7.1956. BLOOMBERG