Yuan strengthens while offshore yuan Hibor touches seven-month high, triggering speculation over PBOC intervention

PUBLISHED : Monday, 12 September, 2016, 12:20pm
UPDATED : Monday, 12 September, 2016, 8:11pm

Hong Kong saw the borrowing cost of offshore yuan in the interbank market continue to rise on Monday, reaching its highest level since February 19.

Analysts see it as a sign of China’s central bank intervening in the market to maintain a consensus that the yuan will be stable ahead of its official inclusion in the Special Drawing Rights basket of the International Monetary Fund in October, despite the increasing odds of a US interest rate rise in September.

The overnight Hong Kong Interbank Offered Rate for offshore yuan, or Hibor, rose 80 basis points to 5.5155 per cent on Monday, according to Treasury Markets Association data. It refreshed its highest level in seven months after the Hibor jumped from 1.57 per cent to 5.45 per cent on Thursday last week.

The two-week Hibor surged to 6.0977 per cent from 3.7960 per cent a day earlier, with one-week Hibor rising to 6.3140 per cent from 4.1220 per cent.

“In the face of the possible Federal Reserve rate rise which will pressure the yuan and given the proximity of the Special Drawing Rights inclusion in October, PBOC wants to maintain the ‘line in the sand’ [of offshore yuan] at 6.70 per dollar and thwart speculation,” said Stephen Innes, senior trader at Oanda Pacific.

PBOC wants to maintain the ‘line in the sand’ [of offshore yuan] at 6.70 per dollar and thwart speculation
Stephen Innes, Oanda Pacific

Such “stealthy currency intervention” by the central bank is probable ahead of yuan’s official inclusion into the SDR basket in October, Innes said, adding that it is difficult for traders to prove whether the guess is correct.

The rise of Hibor increases short seller’s cost of borrowing the currency and dampens speculation activity.

Tommy Ong, executive director at DBS Hong Kong, agreed that PBOC has been intervening the market. “The central bank seems to want to create an expectation that the yuan will be stable and that short sellers shouldn’t speculate too much,” Ong said, adding that he expects the offshore yuan to hover around 6.7 per dollar against the US dollar this year.

Offshore yuan and onshore yuan didn’t see sharp moves on Monday. Onshore yuan closed flat at 6.6799 against the US dollar at 4.30pm although the PBOC cut the yuan fixing to 6.6908, weaker by 224 basis points from the previous guidance to the lowest level in two and a half months. It strengthened 0.07 per cent to 6.6805 at 6.45pm during evening trading .

The offshore yuan stood at 6.6941 per dollar at the same time, 0.03 per cent or 18 basis points stronger from a day earlier.