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Low-flying renminbi yet to create waves

A record run of declines; its worst performance since last year’s surprise devaluation and eight-year lows plumbed on a near-daily basis. Whichever way you cut it, China’s currency is having a testing month.

However, unlike the infamous devaluation ruckus in August 2015, and the turmoil in markets that followed renminbi weakness in January, investors are not panicking this time. At least not yet.

This month the offshore renminbi has lost 2 per cent, taking its drop to 5 per cent so far this year. On Monday, the onshore rate touched an eight-year low of Rmb6.8991 against the dollar, while the offshore rate reached Rmb6.9181 — another record.

“What a lot of clients are asking and what a lot of people are worried about is if people begin to think it’s disorderly — that is where it would have a blowback on the global markets,” says Mansoor Mohi-udddin, strategist at RBS, who still ranks the renminbi as a top-three risk for global markets. “I don’t think we can dismiss the risk of depreciation becoming more disorderly over time.”

One important factor for the calm amid the decline, say investors and strategists, is the market’s comfort with the way China appears to be managing its currency, not against the dollar but against the trade-weighted basket it first detailed last year.

The renminbi, for example, has lost less against the dollar than almost all its emerging market peers in the fortnight since Donald Trump was elected US president.

The onshore rate is down 1.5 per cent, while the offshore renminbi, which in theory trades freely and reflects the international views of China, has fallen 1.6 per cent. Only Russia’s rouble, off 0.2 per cent, has fared better against the dollar.

In this context, the renminbi’s persistent weakness appears the mirror image of the dollar’s strength, rather than evidence of domestic economic pressures in China that investors feared in the August 2015 episode and again this January.

Over the past two weeks the renminbi has, in fact, gained against its basket of currencies even as it has weakened against the greenback.

“It’s not perfect science, you see moves which are not always exactly in that direction [implied by the basket], but a stronger dollar is just translating into weak global currencies as well as the renminbi,” said Neeraj Seth, head of Asian credit at BlackRock.

“What that means from a practical perspective, is if you get a stronger dollar, you should expect to see a weaker renminbi against the dollar but not necessarily against the trade-weighted basket.”

Although the renminbi’s volatility has risen, it’s so far mostly in line with moves by other currencies. One-year implied volatility, a measure of market expectations of how much it could swing, is 8 per cent. That’s relatively low in currency terms and well below the peaks of more than 10 per cent touched in January.

“This is a big contrast to August 2015 — I still remember the jump then from about 3.5 per cent to near 7 per cent,” says Ken Hu, Invesco’s chief investment officer for fixed income in Asia-Pacific. “Since then the market has been expecting the renminbi to have quite similar movements to the Singapore dollar — also a currency pegged to a basket.”

The key unknown is Mr Trump, whose protectionist rhetoric and promises were a key part of his election campaign. The property mogul has promised to label a currency manipulator on the first day of his administration.

That said, the question of trade policies has yet to cross the lips of the president-elect or his advisers since the election. It is a silence that has given investors some reason to believe he intends to tone down his belligerent campaign talk.

Indeed, the Trump administration’s initial focus is likely to be on infrastructure and tax cuts, says Derek Halpenny, currency strategist at MUFG. That, though, does not mean the president-elect will refrain from citing China as a currency manipulator.

“But what would that mean? It formalises bilateral discussions with China that could ultimately lead to tariffs being put in place, but there is a timeframe for this and it won’t be immediate,” Mr Halpenny adds. “I’m not sure markets would be that unsettled by China being cited.”

Still, the renminbi’s steady weakening has prompted foreign-exchange strategists to lower forecasts for next year. Goldman Sachs’ team has made one of the bolder predictions, expecting the currency to reach Rmb7 against the dollar in three months and Rmb7.30 by the end of 2017 as the onshore trading range “continues to grind higher, driven by domestic pressures and in the context of a stronger dollar”.

The median of analysts’ forecasts put the renminbi at Rmb7 against the dollar by the end of 2017, up from expectations six months ago it would be at Rmb6.8. Forward contracts, a measure of market bets, imply it will reach Rmb7.12.

An orderly decline, or a Trump-generated disorderly fall? What the president says, and how China responds, will be high on investors’ 2017 watchlist.

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