A lackluster year for the yuan looks set to take a turn for the worse if history is a guide, with seasonal dividend payouts and a traditional period for foreign vacations set to weigh.
(Bloomberg) — A lackluster year for the yuan looks set to take a turn for the worse if history is a guide, with seasonal dividend payouts and a traditional period for foreign vacations set to weigh.
Chinese firms listed in Hong Kong are set to pay out dividends totaling $80.1 billion this year, of which $68 billion are due in the three months from June, based on preliminary calculations by Bloomberg which are subject to change as companies firm up their schedules. Meanwhile, outbound travel bookings for next week’s Labor Day holiday have jumped, adding impetus to a seasonal wave of foreign currency purchases from local buyers.
The yuan dipped into negative territory against the dollar for the year this week. A look at its performance over the last decade shows on average it continues to weaken from here through the summer months into September.
“There is a strong chance for dollar-yuan to break out of its recent tight range in the coming months due to negative FX seasonality and our expectations of a measured growth recovery in 2023 for China,” said Ju Wang, Head of Greater China FX & Rates Strategy at BNP Paribas. “We expect China’s outbound tourism to pick up from the second quarter onwards, while seasonal dividend outflows may start from May.”
BNP recommended investors short the yuan, targeting a level of 7 per dollar in 12 months, compared with around 6.92 on Thursday. Option traders have also raised their bets that the currency will weaken toward 7 and June will be a popular month for expiries.
Concerns over a deteriorating US-China relationship, the lack of yield appeal in the local bond market and doubts over a sustainable economic rebound have kept foreign investors wary about the yuan this year. One point in its favor could come from the fact that foreign currency deposits are already high and could be used for payouts, according to Lemon Zhang, a strategist at Barclays Bank Plc.
Still, the yuan has been on the back foot despite the dollar experiencing broad-based weakness since March. The onshore yuan is on course for a monthly loss of 0.6% in April, while a dollar gauge has eased by 0.2%.
“The yuan is likely to remain under pressure in the second quarter and we’ll watch for a supporting level at this year’s high at around 7 per dollar,” Li Liuyang and Zhang Wenlang, analysts at China International Capital Corp wrote in a recent note.
(Updated with yuan rates in the seventh paragraph)
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