Offshore yuan slides after record two-day surge, shaking off strongest fixing in 11 years

Wild moves seen in offshore market as the yuan retreats after soaring 2.4 per cent in the past two days

PUBLISHED : Friday, 06 January, 2017, 12:14pm
UPDATED : Friday, 06 January, 2017, 10:12pm

The offshore yuan slid on Friday morning after scoring its biggest two-day gain in history, despite the People’s Bank of China strengthening the currency fixing by the most since it removed a fixed dollar peg in July 2005.

In the meantime, the yuan’s borrowing costs surged to a one-year high in Hong Kong, with the overnight Hong Kong interbank offered rate for offshore yuan fixed at 61.333 per cent.

The offshore market briefly slid 0.8 per cent to a low of 6.841 against the US dollar, the biggest drop in six months. It was changing hands at 6.8231 per dollar at 11am, still down 0.5 per cent from a night trading close of 6.7889 in the previous session.

Over the past two days, the offshore yuan soared a combined 2.4 per cent, the biggest two-day gain ever. The record surge came after various media reports said the Chinese authorities had stepped up intervention in the market to back the yuan and were considering new measures to tighten capital controls.

Possible plans include selling US Treasuries in 2017, if necessary, to defend its own currency and ordering state-owned enterprises to temporarily convert some foreign-currency holdings into yuan under the current account.

“Chinese officials continue to squeeze liquidity in the offshore yuan market,” said Marc Chandler, global head of currency strategy for Brown Brothers Harriman.

On Friday, the Treasury Markets Association set the Hibor for offshore yuan at 61.333 per cent, the highest in a year, compared with a previous fix of 38.33 per cent. The rate shot up to 110 per cent at one point in late afternoon trading on Thursday, the highest level since January 13, 2016.

“In addition to more formal and informal capital controls, Chinese officials triggered a short squeeze that has been painful enough to likely deter aggressive sales in the near term,” Chandler said.

Chinese officials continue to squeeze liquidity in the offshore yuan market
Marc Chandler, global head of currency strategy, Brown Brothers Harriman

Capital controls and the willingness of Chinese officials to facilitate such a powerful squeeze had “demonstrated their resolve and ability” to back the currency, he added.

On Friday morning, the spot market also pulled back following a previous surge. The onshore yuan was trading at 6.8974 per dollar at 11am, down 0.3 per cent from late-night trade on Thursday. On the previous day, it gained 1 per cent by the afternoon close.

On Friday, the People’s Bank of China raised the yuan’s fixing by 639 basis points, the biggest increase since the government abandoned a hard peg and revalued the yuan in July 2005. The yuan’s midpoint rate stood at 6.8668 per dollar, the highest in a month.

However, Chandler said the weak outlook for the yuan would not change in the longer term as the strength in the dollar and an interest rate differential between the US and China would continue to drive the yuan lower.