Yuan to stabilise this week after China central bank intervention
Analysts expect People’s Bank of China to step back from market after Lunar New Year
The yuan is expect to stabilise for the next couple of weeks after the People’s Bank of China used rate increases to fend off attacks by currency speculators, but analysts warn the currency is set to weaken again after the Lunar New Year next month.
“As a result of the PBOC’s intervention, offshore yuan may stabilise around 6.60 over the short term. But after Lunar New Year, it may start to weaken again, especially when most of the underlying negative fundamental drivers remain unchanged,” said Heng Koon-how, senior currency strategist at Credit Suisse.
“These range from on-going FX reserve drawdown, persistent capital outflow and potentially more easing from the PBOC. Our negative view of CNH remains unchanged.”
The PBOC intervened aggressively in the Hong Kong offshore yuan (CNH) market for the first time last week after the currency depreciated by 1.75 per cent in the first week of 2016.
It is important to note that this intervention is unlikely to be maintained for long
The intervention push borrowing costs to a record high of 200 per cent on Tuesday, forcing speculators to wind up their short positions.
The offshore yuan shot up by 1.7 per cent in the first two days of last week and at one stage traded at a premium of 20 basis points to the onshore yuan, a turnaround from a record high discount of 1,400 basis points on January 7.