Taiwan's SMBs likely to continue losses on renminbi speculation
By Kathryn Chiu , The China Post Thursday, March 20, 2014, 12:05 am TWN
TAIPEI, Taiwan -- Taiwanese small- and medium-sized businesses (SMBs), which are said to have sustained the heaviest losses on yuan speculation recently, are expected to continue suffering due to further depreciation of the yuan.
Yesterday was the third trading session after the People's Bank of China's (PBOC) decision to double the trading band for the yuan to 2 percent, leading it to close at a yearly low of 6.2024 on Wednesday.
As part of Beijing's plan to liberalize and internationalize the unit, the new measure announced on Monday allows the yuan to be traded as much as 2 percent on either side of the reference rate.
Dealers said that both the market and PBOC are closely watching the movement of the yuan against the U.S. dollar, saying that the yuan is likely to tilt downward to 6.2.
According to Bank for International Settlements' (BIS) data, the real effective exchange rate (REER) index of the yuan slumped 0.48 percent month-on-month to 120.62 in February, marking the first retreat since last October.
At the same time, the nominal effective exchange rate (NEER) went down 0.74 percent to 114.76 on a monthly basis.
Yuan REER to Continue Losing Streak through March
Dealers told local media that the REER index of the yuan is expected to continue falling through March as mainland Chinese authorities leverage yuan appreciation against the U.S. dollars to stimulate its exports.
If yuan value drops below 6.2, many more companies will be forced to cut loss by selling target redemption forward (TRF) before pre-set date, which will further push down the yuan's currency value against the greenback.
TRF is a structured financial derivative through which allows buyers to benefit from strengthening the yuan. Many investors, mainly from Chinese or Taiwanese companies, have gambled that the yuan will only continue to get stronger against the dollar.
A Morgan Stanley's analyst recently indicated that the yuan's decline is having a broader impact. Many companies borrow money to buy yuan, magnifying gains when the yuan rises but opening them up to big losses if the currency fails.
With the yuan down over 2 percent against the green back this year, more of the trades are losing money, said Morgan Stanley.
Morgan Stanley estimates that paper losses incurred by trading TRF have hit US$2.3 billion, on contract valued at US$150 billion.
Credit Agricole Corporate and Investment Bank said that the yuan's decline is having a broader impact on Taiwanese and Chinese SMBs looking to profit from bets on rise in the yuan.
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