| HONG KONG, June 30
HONG KONG, June 30 Investors who bet on an
appreciating yuan this year, especially carry trade enthusiasts,
have met with dismal returns.
The first half of 2014 has been an forgettable one for the
Chinese currency, so far Asia's worst performer.
Borrowing in an equal-weighted basket of the Japanese yen
, Swiss franc and the U.S. dollar and
investing the proceeds in the Chinese yuan, would
have handed investors a negative return of 3.4 percent in the
first six months of 2014, a Thomson Reuters analysis shows.
Carry trades -- borrowing in lower-yielding currencies and
investing in higher-yielding ones -- is a strategy pursued by
investors especially in times of low market volatility.
The renminbi's underperformance stands out even more starkly
if seen through the lens of the Sharpe ratio, which takes into
account percentage returns of the currency minus risk-free rate
returns adjusted for currency standard deviation or swings.
Using that metric, the Chinese currency has notched up a
ratio of minus 2.2, the worst six-month performance since the
second half of 2010, according to Thomson Reuters data. In
comparison, on a Sharpe-ratio basis, the renminbi posted a rate
of return of 2.8 in the corresponding period of last year.
That is because while currency market volatility in general
has been subdued for much of this year, the renminbi's moves
have been unusually volatile thanks to the People's Bank of
China's stance towards the currency.
"The underperformance of the yuan in the first half has been
led by the central bank's policies to stamp out hot money
inflows into the market," said Dominic Bunning, a senior
currency strategist at HSBC in Hong Kong.
"Now that policy has largely succeeded, we expect a return
to a path of modest appreciation in the second half," said
Bunning, who expects the yuan to strengthen to 6.14 by the end
That performance changes only marginally, with the overall
trend to remain intact, even if one of the borrowing currencies
is substituted with other low-yielding currencies such as the
In at least two different phases in February and April, it
brought U.S. dollars aggressively via its agent banks in the
currency markets and fixed the daily midpoint -- around which
the currency is allowed to trade -- sharply weaker against the
dollar, according to traders.
It also widened the currency trading band to 2 percent in
March from a previous 1 percent, giving it greater flexibility
to carry out its currency market policies.
The change in the PBOC's stance towards the currency is not
China's economic growth was at its slowest in 18 months in
the first quarter at 7.4 percent from a year earlier, and a
growing number of economists believe Beijing would find it
difficult to meet a target of 7.5 percent for the full year.
Some hedge funds are betting that a weaker currency would
help make Chinese exports more competitive, thus putting a floor
under slowing growth.
It would also deter speculative capital flows into the
country and reduce the headache for the country's foreign
exchange regulator who faces a growing mismatch between its
assets and liabilities.
But the renminbi's pronounced weakness in the first half has
started to make some investors cautiously optimistic about a
rebound in the currency in the second half. On Monday, the yuan
stood at 6.2070 per dollar, just below its strongest level in
more than two months.
Investor sentiment on most emerging Asian currencies
improved over the last two weeks, with the first bullish bets
seen on China's yuan in four months as the currency showed signs
of stabilising, a Reuters poll showed.
With China embarking on a wave of reforms in recent weeks
aimed at simplifying the movement of funds across borders,
market watchers believe the central bank is satisfied with the
level of the currency for now, another sign of likely slower
(Editing by Jacqueline Wong)