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.
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.
“It is important to note that this intervention is unlikely to be maintained for long, as it would disrupt the normal two-way functioning of both the Hibor and CNH market, and cause a fall in market liquidity as well,” Heng said. “This intervention via higher funding rates is also a blunt tool that does not discriminate between speculators or those with actual financing needs.”
He said the intervention also went against the spirit of internationalising the yuan.
Dean Popplewell, vice-president of currency and research analysis at currency trading firm OANDA said: “For now the PBOC is winning the battle, they are supposedly using various strong-arm tactics to influence state-owned banks to help manipulate the offshore yuan rate in Hong Kong.
“This ‘manipulation’, similar to their efforts to manipulate the country’s stock market, undercuts the IMF’s argument to add the yuan to the SDR basket of currencies.
“It’s true, the currency is being used more and more for global trade, but it’s not considered to be ‘freely or easily’ traded just yet.”
Pheona Tsang, head of fixed income of BEA Union Investment, said the yuan would trade in a more stable range this week after the PBOC intervention.
“The PBOC can accept the yuan devaluing but not as rapidly as in the first week of this year,” she said.
Tsang said the central bank would continue to intervene in the market when needed and she expected the yuan would depreciate up to 5 per cent this year.
“There is a difference to devaluing 5 per cent in a year and 5 per cent in one or two weeks,” she said. “This is why the PBOC has to intervene and the other central banks would do so if they faced a similar situation.”