Yuan hits one-month high as short-sellers wind up positions

Central bank sets mid-price sharply higher for second day in a row

PUBLISHED : Friday, 05 February, 2016, 12:40pm
UPDATED : Friday, 05 February, 2016, 12:42pm

Offshore yuan hit a one-month high on Friday as the People’s Bank of China set the mid-price sharply higher for the second day in a row and traders wound up their short positions ahead of the Lunar New Year holiday next week.

Offshore yuan traded by international investors traded at 6.5633 per US dollar in early trade, the strongest level since January 13, before softening back to 6.5753 at 11.45am, edging down 0.01 per cent from Tuesday when it rose by 0.56 per cent.

The PBOC set the yuan mid-price against the US dollar at a fresh one-month high of 6.5314 on Friday, stronger by 105 basis points than Thursday when it was stronger by 102 basis points. It has risen 0.3 per cent in the two days.

Traders are allowed to trade 2 per cent up or down from the mid-price set by the PBOC at 9.15am. The mid-price is taken as a type of a guidance and they believe the central banks setting the mid-price higher two days in a row indicates it would like to see the yuan trade stronger today ahead of the Lunar New Year holiday next week.

On a weekly basis, the currency is poised to report a 0.22 per cent rise this week which would mark the fourth weekly rise in a row, offsetting the 1.72 deprecation in the first week of this year to bring the year-to-date loss to 0.16 per cent.

Stephen Innes, a senior trader at OANDA, said the offshore yuan was so strong that it traded stronger than the onshore yuan at one stage. On Wednesday offshore yuan once hit a three-week low and traded a discount of more than 700 basis points to the onshore yuan.

He said Friday’s rise was due to some traders winding up their speculative short positions on the offshore yuan ahead of the Lunar New Year, which will start from Monday, with the Hong Kong market closing for three days and the mainland market closed for the whole week.

“Of course, one has to take these moves with a grain of salt as they’re likely amplified by dwindling liquidity,” Innes said. “At most, regional interbank players are likely to square off, or hedge, going into the Chinese Lunar New Year.

“Market expectations are running high now that we are nearing a devaluation in the US dollar and onshore yuan, which is primarily based on the huge capital outflow, as China continues to struggle with reforms and making adjustment to their currency policy regime.”

The Hong Kong dollar rose for the third day in a row to trade at 7.7835 per US dollar at 11.45am on Friday, stronger by 0.05 per cent from Thursday, when it rose 0.08 per cent. On a weekly basis, the Hong Kong dollar is still weaker by 0.05 per cent after a sharp fall of 0.27 per cent on Tuesday which at one stage took it down to 7.8008, at the weaker end of the peg.

The local currency has weakened this year after the US increased interest rates in December. It fell 0.55 per cent last month and hit 7.8294 on January 20, an eight-and-a-half-year low. It was only after some buy orders which traders believed to be Hong Kong Monetary Authority intervention that the currency moved back to the strong end of the peg at 7.80.

Onshore yuan traded mainly by mainlanders remained flat at 6.5690 per US dollar at 11.45am, weaker by 0.08 per cent. The currency has risen 0.09 per cent this week and has risen four weeks in a row, after a depreciation of 1.56 per cent in the first week of this year.

The PBOC set the mid-price of the yuan against the euro weaker by 578 basis points to 7.3333, and for every 100 yen weaker by 441 basis points at 5.5977. The mid-price against the pound was set 161 basis points stronger at 9.5480.