Despite Beijing's line, investors gun for yuan at 7 to the dollar
* Options, NDFs show investors bet on yuan weakening to7/dollar
* PBOC insists there is no deliberate currency weakening
* Easing monetary policy, rising dollar set up yuan fordeclines
By Andrew Galbraith and Noah Sin
SHANGHAI/HONGKONG, Oct 16 (Reuters) - Investors are bettingthat the powerful forces of easier monetary policy at home andunrelenting gains in the U.S. dollar will push China's yuandown, even as Beijing categorically insists that it isn'tpursuing currency depreciation.
The yuan, or renminbi, is already down 10 percentagainst the dollar since March, when the first round oftit-for-tat tariffs in the U.S.-China trade war was announced.
However, the tightly managed currency is just slightlyweaker than its peers in trade-weighted terms , and thePeople's Bank of China (PBOC) has been at pains to ensure itsdaily benchmarks don't signal a preference for a weaker yuan.
But as investors wait to see if China is labelled a currencymanipulator in a U.S. Treasury report due this week, and as PBOCGovernor Yi Gang reiterates Beijing's determination to keepeasing policy, they are also betting the yuan is heading for thekey 7-per-dollar level - about a percent weaker than its currentone.
Offshore yuan forwards and yuan options show currency marketparticipants are wagering on the currency creeping to 7.00 orlower, last seen during the 2008-2009 global financial crisis.
Ken Cheung, senior Asian FX strategist at Mizuho Bank, saidthe PBOC "has not come up with a hawkish stance so far tosupport the exchange rate, unlike in 2015 and 2016, when theyrepeatedly said they didn't see the basis for furtherdepreciation."
"Back then, people doubted the PBOC's capability tostabilise the yuan, but they didn't doubt their willingness todo it," he said. "This time, it's the other way around. Theirstrategy is to guide the renminbi lower with the daily fixing."
The past year has seen China softening a campaign to weanthe economy off debt, and easing monetary conditions in the faceof slower growth and sharp stock market declines.
It is a marked shift from the 2015-2016 yuan sell-off, whenBeijing ramped up capital controls and interest rates to supportthe currency.
POSITIONING NOT EXTREME YET
The PBOC governor has said China would keep the yuan's value"broadly stable", but that it would "continue to let the marketplay a decisive role in the formation of the yuan exchangerate."
Yi said that China "will not engage in competitivedevaluation, and will not use the exchange rate as a tool todeal with trade frictions."
One-year non-deliverable yuan forwards contracts (NDFs),seen as the best indication for market expectations of theyuan's value, traded on Tuesday at 7.02 , about 1.2percent weaker than current levels.
In the options market, risk reversal spreads ,which show the extent of bias in the market, held near theirhighest levels since early 2017 in favour of dollar calloptions, suggesting investors were paying a hefty premium to beton the yuan falling.
But Jack Siu, senior Asia-Pacific investment strategist atCredit Suisse, points out that while the bearishness evinced inyuan options was near its highest point since early 2017, thebias for weakness was still far less than in early 2016."Falling through 7 if the U.S. dollar strengthens againstother currencies would not be over-the-top," Siu said.
While short-term uncertainties may drive the yuan beyond 7,Credit Suisse sees the currency steadying at 6.95 in 3 months,and recovering to 6.85 in a year's time.
Naoto Saito, chief economic researcher at Daiwa Institute ofResearch in Tokyo, said the yuan's weakness was more a functionof the dollar's strength.
"I know some people say China must defend the yuan at 7 perdollar but I disagree. There's no point worrying about the yuangoing below 7," he said.
(Additional reporting by Hideyuki Sano in TOKYO; Editing byVidya Ranganathan and Richard Borsuk)
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