PBOC battles speculators by boosting offshore yuan interest rate above 9pc

PUBLISHED : Friday, 19 February, 2016, 7:02pm
UPDATED : Friday, 19 February, 2016, 7:02pm

The battle between the People’s Bank of China and currency speculators was back on Friday, as the yuan ended the five-day trade with its first weekly drop against the US dollar in six weeks.

Hong Kong traded yuan was at 6.5239 per US dollar at 4.15pm, weaker by 0.04 per cent from Thursday and down 0.28 per cent his week. The offshore yuan forward contracts were also weaker, changing hands at 6.78 on Friday compared to 6.70 at the start of the week.

Traders said China’s central bank had asked mainland banks not to sell any yuan but only buy the currency on Friday. The overnight interbank interest rate for offshore yuan, or CNH Hibor, shot up on Friday to 9.265 per cent, up from 4.45 per cent on Thursday. This is the highest overnight lending rate since the PBOC intervened on January 12.

The one-week lending rate rose to 7.9 per cent while the three-month rate inched up to 6.5 per cent, from 5 per cent on Thursday.

Heng Koon How, senior currency strategist of Credit Suisse, said the yuan, Korean won and other Asian currencies were dragged lower due to weak economic data around the region.

“This is a clear sign of renewed offshore yuan weakness and it appears that the market has reverted back to the negative fundamentals affecting China and Asia. The higher offshore yuan rate curve and tightening of liquidity is a reaction function of renewed offshore yuan weakness,” Heng said.

“This time round, it is unrealistic to expect the big jump in offshore yuan rates like what we had seen in early January to stratospheric levels. However, given the underlying concerns, I would expect offshore yuan rates to stay at elevated levels for longer.”

He added that the short term rate would likely stay at 10 per cent while the six-month rate would hold around 6 per cent for a while.

Jasper Lo Cho-yan, director of Tung Shing Futures, said the PBOC wouild intervene in the market to keep the yuan strong to prevent speculators’ attacks as the US dollar turned stronger in the past two days.

“The PBOC is determined to keep the yuan stable. It wants to prevent speculators’ attack ahead of the G20 central bank meeting in Shanghai next week,” he said.

“By keeping the CNH Hibor up, it will add costs for the speculators to borrow the yuan to short sell the currency. The yuan funding in Hong Kong is likely to continue to be high next week.”

As of Friday, the offshore yuan is up 0.67 per cent against the US dollar this year. By the end of the first week of the year the currency was down 2 per cent against the dollar, prompting PBOC intervention.

The onshore yuan traded at 6.5200 at 4.15pm, weaker by 0.04 per cent from Thursday. It has risen 0.16 per cent this week.