Yuan weakened on S&P’s credit outlook downgrade for China and Hong Kong

Credit agency cuts sovereign credit outlook to negative for China and Hong Kong took yuan lower and undercut other positive economic news

PUBLISHED : Friday, 01 April, 2016, 2:01pm
UPDATED : Friday, 01 April, 2016, 2:01pm

The yuan weakened on Friday morning after ratings agency Standard & Poor’s cut its sovereign credit outlook for mainland China and Hong Kong to negative. That undercut positive news of a bounce back in the Chinese purchasing managers’ index (PMI).

Offshore yuan in Hong Kong traded at 6.4700 to the US dollar at noon on Friday, down 0.15 per cent from the day before.

It reached a one-week high of 6.4600 on Thursday. Traders said the S&P decision has brought any rally for this week to an end. The Chinese currency ended the first three months of this year 1.59 per cent up against the dollar, the strongest quarterly gain in four years.

It is 0.84 per cent higher this week, the best weekly gain since mid-February.

The borrowing cost of the offshore yuan, called CNH Hibor, returned to normal with the overnight interest rate fixed at 1.45 per cent on Friday morning by the Treasury Markets Association. That was after it slipped into negative territory for the first time ever on Thursday at -3.725 per cent. That was the result of the yuan’s recent rally that forced short-sellers to wind down their positions and boost liquidity in the offshore yuan market.

Stephen Innes, senior trader at OANDA Asia Pacific, said the negative interest rate of the CNH funding was a result of end-quarter influences and an unwinding of forward hedges used to fund short CNH positions.

Innes said the funding position returned to normal on Friday while the China’s PMI was 50.2 in March, better than the 49.4 expected. A PMI of more than 50 represents expansion of the manufacturing sector.

He said the market also welcomed news that the People’s Bank of China (PBOC) reported data on its derivatives holdings positions in forwards and futures in foreign currencies versus the onshore yuan for the first time on Thursday.

“It should be viewed as a big positive as it should address some transparency concerns from both investors and the International Monetary Fund (IMF), who recently requested additional information about the PBOC derivative holding,” Innes said. “The move is expected to address appeals from investors and the IMF that the central bank cast more light on its derivatives.”

It should address some transparency concerns from both investors and the International Monetary Fund
Stephen Innes, senior trader at OANDA Asia Pacific on the Chinese central bank’s publication of currency derivatives data

The data shows that the central bank holds a nominal short position of US$28.9 billion and US$2.438 billion worth of total long positions.

The PBOC said on Friday the yuan midpoint was 6.4585, up 0.04 per cent or 27 basis points.

Onshore yuan in Shanghai weakened to 6.4648 at noon on Friday, down 0.26 per cent from Thursday when the currency strengthened to a year-high 6.4490. The currency this week rose 0.74 per cent, compared with a weakening of 0.69 per cent in the previous week.

This week’s yuan rally followed falls in the US dollar after a dovish speech by Federal Reserve chair Janet Yellen on Tuesday in which she hinted interest rate hikes will come a slow pace. The US dollar remains weak against other currencies.

“Given that the Fed’s stuck in the mud, I would expect traders to use any positive US economic data to increase short USD bets,” Innes said.

The Hong Kong dollar also traded strongly at 7.7539 at noon on Friday, up 0.03 per cent compared with Thursday. This is just shy of a year-high 7.7503 that was reached on January 4.