China’s yuan rebounds after central bank sets mid-price currency fix at one-month high to ward off speculative attack

Traders warn speculators could mount assault over Lunar New Year holiday

PUBLISHED : Thursday, 04 February, 2016, 12:15pm
UPDATED : Thursday, 04 February, 2016, 7:45pm

The yuan bounced back on Thursday after hitting a three-week low in the previous session after the People’s Bank of China set the mid-price fix at a one-month high, which the market saw as guidance for the currency to trade stronger ahead of the Lunar New Year holiday period.

But traders warn the battle will continue as the yuan options markets showed many speculators were betting the yuan would substantially depreciate over the long term.

The offshore yuan traded by international investors was seen at 6.6030 to the US dollar at 5.45 pm on Thursday, up by 0.11 per cent from Wednesday when it fell at one stage to a three-week low of 6.6507. The currency is down over 0.3 per cent on the week week, having gained the past two weeks.

The PBOC set the yuan mid-price at 6.5419 on Thursday, stronger by 102 basis points from Wednesday and the highest level in a month. Traders can trade 2 per cent above or below the reference price set by the central bank.

The offshore yuan’s intraday low on Wednesday was similar to the level of January 11 when the PBOC last intervened to strengthen the yuan.

The spread between the onshore and offshore yuan has narrowed to 262 basis points, down from 737 basis points which is a three-week high hit on Wednesday and well below the record 1,400 basis point pread touched on January 7.

Jasper Lo Cho-yan, director of Tung Shing Futures, said the PBOC may intervene in the offshore yuan market this week as many believe the currency speculators were likely to continue attacking the yuan and the Hong Kong dollar during the Lunar New Year holiday starting next week.

“The PBOC and HKMA have been closely monitoring the market as many hedge funds last week said they have been shorting the yuan and Hong Kong dollar as well as other Asian currencies. The overall sentiment for the yuan and Hong Kong dollar remains weak.” he said.

While the central bank action may boost the yuan and Hong Kong dollar, he said the battle may flare anew.

“It is likely the attack would come when both China and Hong Kong are on holidays. Speculators are likely to short the currency in overseas markets in the US, London, Singapore or Japan, which remain open during the Lunar New Year. The central banks would need to prepare to fend off the speculators,” said Lo.

The currency depreciated up to 2 per cent against the US dollar in the first week of this year and hit a record low of 6.7511 on January 7, prompting the PBOC to intervene to prevent interest rates from rising by driving speculators off.

Hedge funds believe the yuan will depreciate further with some saying the yuan could fall by up to 40 per cent in three years. The PBOC insists that is not the case, predicting a gradual decline in the currency.

The Hong Kong dollar traded 7.7842 to the US dollar at 6.45 pm on Thursday, rising 0.15 per cent from Wednesday.

The local currency fell 0.55 per cent last month and hit 7.8294 on January 20, an eight-and-a-half-year low. The currency recovered after the Hong Kong Monetary Authority intervened by buying up the local dollar, traders said.