Across The Border | Chinese yuan’s surprise rebound unlikely to be sustained, say analysts

China’s yuan took the market by surprise at the beginning of 2017 with its biggest weekly gain ever amid tighter offshore liquidity and capital control measures, but analysts expect the rally to be temporary and anticipate more volatility for the currency in the year ahead.

During the first week of the new year, offshore yuan jumped 2.2 per cent against the US dollar and closed the week at 6.85, the largest weekly gain on record, driven by the surging offshore yuan (CNH) funding rate along with a weakened dollar index.

Hong Kong’s actual overnight offshore yuan borrowing costs at one point last Thursday shot up to above 110 per cent after the benchmark CNH Hibor was set at 38.33 per cent on that day. Yuan bears rushed into the market for CNH to square their short positions as short term expectations reversed.

The offshore rally also boosted onshore yuan, pushing it up to a short term high of 6.88 before both eased late Friday.

Credit Suisse analysts wrote in a note issued last Friday that the outlook of yuan against the US dollar “stays weak”.

“Chinese authorities stepped up efforts to limit the immediate weakness in both onshore and offshore yuan. However, there are lingering concerns about China’s persistent capital outflows, a contraction of the country’s currency reserve and growing corporate sector debt. We therefore believe that both the onshore and offshore yuan may well resume their weakening trend once this consolidation is over,” the note said.