Hong Kong dollar recovers but yuan remains soft

PUBLISHED : Wednesday, 27 January, 2016, 11:28am
UPDATED : Wednesday, 27 January, 2016, 11:27am

The Hong Kong dollar recovered on Wednesday morning while the yuan fell for the second day in a row, with analysts saying it remains on a weakening trend.

The Hong Kong dollar traded at 7.7889 per US dollar at 10.10 am on Wednesday, up 0.06 per cent from Tuesday, when at one stage it was down to 7.8011.

The local currency is trading more stably this week after a bumpy ride last week when it hit 7.8294, an eight-and-a-half-year low. The Hong Kong dollar bounced back after some big buying orders, which currency traders believed was the Hong Kong Monetary Authority taking action to prevent the currency from falling too low, pushed the currency to trade above 7.80 level from Thursday of last week.

Offshore yuan softened on Wednesday to trade at 6.6101 per US dollar at 10.10 am, down by 0.03 per cent from Tuesday, when it fell 0.02 per cent. The currency rose 0.07 per cent last week after a strong gain of 1 per cent the previous week on People’s Bank of China intervention.

A DBS report said the offshore yuan has been on a weakening trend. The PBOC injected liquidity into the financial system to solve the liquidity crunch ahead of the Lunar New Year on February 8.

“Notably, the authorities are aware that financial conditions are tightening (the lead up to the Chinese New Year also exacerbates the crunch) and are regularly injecting liquidity into the financial system,” the DBS report said. “Without these liquidity injections, onshore interest rates would have been much higher as the People’s Bank of China intervenes to stabilise the currency. The risk of a negative feedback loop building is rising. Without a clear outlook, the equity market and currency may be prone to sell-offs, putting upward pressure on onshore interest rates.”

Onshore yuan remain flat at 6.5794 per US dollar on Wednesday morning, stronger by 0.03 per cent from Tuesday.

The spread between the onshore and offshore yuan has now narrowed to 307 basis points, down from a record 1,400 basis points on January 7.

The PBOC set the yuan mid-price against the US dollar at 6.5533 on Wednesday, 15 basis points stronger than Tuesday and the fourth day in a row the central bank has set it higher.

It set the mid-price of the yuan against the euro weaker by 41 basis points to 7.1224, and for every 100 yen stronger by 12 basis points at 5.5481. The mid-price against the pound was set 784 basis points weaker at 9.4139.

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