Asian shares in for worst week in 4 years

Bankers said a notable absence in leveraged bets on the value of the Chinese currency, especially in a popular structured product – target-redemption forwards – has reduced pressure substantially on financial institutions and companies to hedge risks from a falling currency in derivatives.

Investors fear China’s economy is even weaker than had been imagined, with Beijing, in a bid to help exporters, allowing the yuan’s depreciation to accelerate.

“Unlike August, when many currency option books were positioned the wrong way when China pressed the devaluation button, positions are very light”, the head of trading at a European Bank in Hong Kong said. “There is still large room for necessary operations to sustain a stable yuan”, Li said.

Bearish bets on the renminbi hit a near six-year high, denting sentiment towards most other regional units, a Reuters poll of fund managers, currency traders and analysts showed on Thursday.

So it’s clear Chinese officials feel they must do something about the yuan.

The Federal Reserve was closely monitoring the Chinese equities selloff that shook world markets on Thursday, while US lawmakers were uncharacteristically silent on a further deterioration in the value of the yuan currency.

The Fed worked through similar global market turmoil a year ago when a market sell-off in China triggered a fall in USA stocks, prompting the Fed to hold off on a widely expected interest rate rise at its September policy meeting.

Beijing’s critics, according to some Asian central bankers, were in danger of misreading its actions in the currency market.

The PBOC set the daily fixing for the yuan at 6.5636 per USA dollar, 0.02 per cent up from Thursday, having slashed the reference rate by 1.4 per cent over the past eight days.

Hong Kong reserves stood at US$358.8 billion at the end of last month, its Monetary Authority said, up 0.8 per cent from US$355.8 billion at the end of November.

“It’s not like they’re buying heaps of dollars to weaken their currency”, said a senior Bank of Korea official, speaking on condition of anonymity.

How far and how fast could be the most pertinent questions.

In Tokyo, the dollar rose to 118.21 yen from 117.65 yen Thursday in NY, although it is still well down from levels above the 120 yen mark seen earlier in the week.

The market fell almost 2 percent more in just one minute after trading resumed and then was closed for the day. This means the budgets, exchange rates and economies of commodity exporting countries – mainly emerging markets – are suffering.

“Depreciating the rupee has more cost than benefit for India as we are net importers”. United States payroll growth surged in December, capping the second-best year for American workers since 1999.

The Australian and New Zealand dollars, perceived as the major currencies most dependent on China’s economic and financial prospects, were also both solidly higher, recovering some of this week’s more than 3 percent slide.

The central bank’s strategy has backfired.