Yuan jumps to 3-month high as central bank intervenes to squeeze currency bears

Analysts think the strengthening in the yuan’s exchange rate is a ‘warning’ to short sellers from the Chinese central bank

PUBLISHED : Friday, 26 May, 2017, 12:05pm
UPDATED : Friday, 26 May, 2017, 6:14pm

The Chinese yuan rose sharply on Friday in the offshore market, hitting its highest level in three months, as traders suspected the People’s Bank of China (PBOC) had intervened to prop up the currency and squeeze short sellers to defy the downgrade of China’s credit ratings by Moody’s Investors Service.

In Hong Kong, the US dollar lost as much as 219 basis points against the offshore yuan, trading at 6.8271, the worst level since February. By 6pm, the US dollar bought 6.8281 yuan, down 0.3 per cent from 6.849 late Thursday.

The spot yuan also advanced in Shanghai. The US currency traded at 6.8618 per yuan at 6 pm, down 0.1 per cent from 6.8685 late Thursday.

“In defiance to the Moody’s downgrade, the state-owned banks are big sellers of the dollar as the PBOC wants its currency strong and stable,” said Stephen Innes, senior trader at Oanda Asia Pacific.

The PBOC typically uses state-owned banks to intervene in the market and influence the yuan’s value.

On Wednesday, Moody’s Investors Service downgraded China’s credit rating for the first time since 1989, citing the country’s worsening debt outlook. Hours later, it cut Hong Kong’s credit rating by one notch, saying credit trends in China will have a significant impact on Hong Kong given its close economic, financial, and political ties to the mainland.

China’s finance ministry rebuffed the downgrade as “groundless”.

It appears the [Moody’s] downgrade [this week] has got on the China government’s nerves
Ken Cheung, currency strategist, Mizuho Bank

On Thursday, the onshore and offshore yuan both surged by more than 0.3 per cent. The yuan borrowing costs in the overseas market also surged, with the overnight Hong Kong Interbank Offered Rate for offshore yuan, known as the CNH Hibor, spiking to 4.16 per cent from a previous 2.77 per cent.

The strengthening in the yuan’s exchange rate is a “warning” to short sellers from the Chinese central bank, analysts said.

“Indeed, it appears the downgrade has got on the China government’s nerves,” said Ken Cheung, a currency strategist for Mizuho Bank.

“In our view, the Chinese authorities might attempt to give a warning on the RMB bears who speculate on RMB depreciation following the downgrade on China. This also shows that China policy makers might have stepped up its action to defend RMB exchange rates.”

Earlier on Friday, the PBOC set the yuan’s mid-point rate slightly weaker at 6.8608 per US dollar, down 3 basis points from the previous fix of 6.8695.

In other currency trading, the ICE US Dollar Index slipped 0.1 per cent to 97.116 as of 6pm.

Against the Japanese yen, the US dollar declined 0.8 per cent to ¥110.96 from ¥111.84 late Thursday.

In the meantime, the euro rose 0.1 per cent to US$1.122, while sterling fell 0.5 per cent to US$1.2876.