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

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. 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.