China bulls, watch out.

Forwards markets are once again flashing bearish signs for the renminbi. For the first time since mid-January, non-deliverable forwards are pricing in zero appreciation of the Chinese currency against the US dollar over the coming year.

That contrasts starkly with the expectations of most investment bank economists, who forecast that the renminbi will rise about 3 per cent against the dollar over the next 12 months.

The chart below shows the gap between 12-month renminbi NDFs and the renminbi spot rate. It provides an indication of whether investors expect the renminbi to appreciate or depreciate against the dollar over the coming year. In the chart, which goes back to last June, the green areas imply that the market was expecting renminbi appreciation; the red areas imply the opposite.

Since Friday, the renminbi has fallen about 0.3 per cent to Rmb6.314 per dollar. In the NDF market, the 12-month forward was on Wednesday trading at virtually the same level, having traded weaker than the spot rate on Tuesday (as shown by the mini red spike in the chart at the farthest right point.)

The recent sell-off in renminbi NDFs may be a bad sign for risk assets in general. Indeed, global equity markets have fallen sharply this week, with the Hang Seng down by almost 4 per cent over the past three days.

The change in appreciation expectations may also have been influenced by statements from Chinese policymakers. This week, Zhou Xiaochuan, governor of the People’s Bank of China, hinted that Beijing may soon loosen its grip on the country’s currency, saying the renminbi should be allowed to float more freely. He also said the renminbi exchange rate was close to equilibrium, evidenced by the shrinking trade surplus.

Analysts took the comments as a signal that Beijing was ready to widen the renminbi-dollar trading band, a move that would bring more market forces to bear on the Chinese currency.

The trouble is, for the time being at least, the market appears to have lost its appetite for the renminbi.

Related reading:
Rmb: of limited use?
beyondbrics
Rmb reform: helping equities
, beyondbrics
Trading in forward renminbi surges, FT (2010)

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