Offshore yuan reverses overnight gains to trade lower after US rate rise

Onshore yuan was up at the opening bell, as it caught the momentum that had driven the offshore rally

PUBLISHED : Thursday, 16 March, 2017, 1:08pm
UPDATED : Thursday, 16 March, 2017, 1:08pm

China’s offshore yuan surged to a three-week high overnight before reversing to trade lower on Thursday morning after the US Federal Reserve raised interest rates but struck a dovish tone about future increases.

Onshore yuan started to catch up with the rising momentum of offshore yuan, and was trading higher at the opening bell.

Offshore yuan in Hong Kong was 0.28 per cent, or 189 points, weaker at 6.8659 as of 11.15 am, after rallying 0.77 per cent, or 530 points, overnight. Onshore yuan in Shanghai, however, traded 0.29 per cent or 200 points stronger at 6.8932.

The People’s Bank of China guided the midpoint rate up by 253 basis points, or 0.37 per cent, to 6.9115. Traders in the mainland are allowed to trade the currency within a 2 per cent range of the guided price.

The onshore yuan traded up higher as it is now catching up with the reaction of offshore yuan overnight
Thomas Shik, Hang Seng Bank

The “different trading times” between China’s offshore and onshore yuan is one of the biggest factors that determines their different performances, according to market watchers.

“The onshore yuan traded up higher as it is now catching up with the reaction of offshore yuan overnight, due to their different trading times,” said Thomas Shik, Hang Seng Bank’s acting chief economist. “The offshore yuan eased its overnight gains as the market has priced in the US rate hike news.”

The US Federal Reserve early on Thursday raised the target overnight interest rate by 25 basis points to a range of 0.75 per cent to 1.0 per cent. It is the second increase in three months, and signalled two further increases this year.

However, Fed Chair Janet Yellen signalled that the pace of rate increases may be more gradual than the market has been expecting.

“The simple message is the economy is doing well,” she said during a press conference in Washington DC. She added it is “still too early to know how these policies will unfold”, referring to President Donald Trump’s plans to cut taxes, deregulate and boost spending on infrastructure.

“Yellen’s speech is not as hawkish as expected and therefore we see US stocks rallied, bond yields dropped and the US dollar weakened overnight,” Shik said. “We still believe the yuan is facing less depreciation pressure compared with a year earlier, especially when China’s economic data are becoming robust.”

He expects onshore yuan to fall 3 to 4 per cent this year to 7.2 against the US dollar.

The dovish announcement from the US central bank dragged down the greenback. The DXY dollar index dropped 1.24 per cent at one point to 100.26 but had narrowed its losses to trade 0.14 per cent lower at 100.6 as of 11.15 am.

The major currencies all lost their overnight gains to trade lower on Thursday morning.

The British pound traded 0.18 per cent lower at 1.2272 against the dollar after surging 1.14 per cent overnight, while the euro was 0.06 per cent lower at 1.0725 after a 1.23 per cent rally.

The yen was 0.02 per cent lower at 113.38.