Offshore yuan weakens for second day but reports strongest weekly gain in three months following China central bank intervention earlier this week

Analysts expect People’s Bank of China to intervene again

PUBLISHED : Friday, 15 January, 2016, 1:23pm
UPDATED : Friday, 15 January, 2016, 1:23pm

Offshore yuan weakened further on Friday morning but the currency is still poised to post its strongest weekly gain since October after the People’s Bank of China’s aggressive intervention earlier this week to raise borrowing yuan costs in order to drive away currency speculators.

The offshore yuan traded lower for the second day in a row and was at 6.6160 against the US dollar at 11.30am, weaker by 0.24 per cent, after a fall of 0.53 per cent on Thursday when the PBOC stopped its intervention, currency traders said.

On a weekly basis, however, the currency traded by international investors in Hong Kong was still up 1 per cent after this morning’s trade, the strongest weekly gain since October, and a sharp turnaround from a fall of 1.72 per cent last week.

“The PBOC has no longer intervened in the offshore yuan market over the past two days and the interest rate for the currency has fallen as a result. This has led traders back to sell the currency,” said Jasper Lo Cho-yan, a director of Tung Shing Futures.

The PBOC has burnt the fingers of some speculators but they will not end the game
Jasper Lo Cho-yan, Tung Shing Futures

“The PBOC has burnt the fingers of some speculators but they will not end the game. They will test the market sometime next week. The trend is the yuan will continue to fall unless the PBOC intervenes again. The central bank will not always intervene but it will definitely act again when the yuan falls too sharply.”

The intervention, which saw the PBOC ask mainland-based banks not to sell any yuan and only buy the currency in the market, dried up liquidity. This raised yuan borrowing costs in the offshore yuan interbank market – CNH Hibor – which shot up to a record 200 per cent for overnight funding on Tuesday afternoon before falling back to 8 per cent on Wednesday. They were fixed at 2.10 per cent on Friday morning.

The other short-term rates remain high, however, with the one-week rate fixed at 8.2080, one-month at 9.3240, and three-month at 8.4755.

Onshore yuan traded in Shanghai rose 0.03 per cent to 6.5866, 294 basis points stronger than the offshore yuan, after setting a record discount of 1,400 basis points last week. On a weekly basis, the onshore yuan has risen 0.1 per cent this week, compared with a fall of 1.56 per cent last week.

The PBOC set the mid-price of the yuan against the US dollar at 6.5637, weaker by 21 basis points. On Thursday it set the yuan mid-price 14 basis points stronger.

It set the mid-price against the euro stronger by 71 basis points at 7.1397 on Friday and the mid-price against every 100 yen stronger by 196 basis points at 5.5661. The mid-price agains the pound was set 253 basis points weaker at 9.4862.

Traders are allowed to trade up to 2 per cent either side of the mid-price for the day.

A Bank of America Merrill Lynch report on Friday said the PBOC might tighthen capital controls to prevent capital outflow and further yuan depreciation.

“Market sentiment will potentially deteriorate further if the drop in official FX reserves accelerates to beyond US$100 billion per month, as seen from recent months. However, we believe when market confidence is destabilised, policymakers will likely consider raising capital control more significantly to slow down capital outflow,” the report said.

One potential restriction would be tightening up on mainland individuals entitlement purchase US$50,000 a year.

“The State Administration of Foreign Exchange might consider tightening related individual FX purchase policies as a part of its macro prudential measures under special circumstances,” the report said.