Yuan jumps after suspected central bank intervention

In the offshore market in Hong Kong, the US dollar bought 6.8020 yuan, weaker by 0.2 per cent

PUBLISHED : Wednesday, 28 June, 2017, 12:03pm
UPDATED : Wednesday, 28 June, 2017, 6:41pm

The Chinese yuan strengthened sharply on Wednesday in both onshore and offshore markets after suspected intervention by the People’s Bank of China (PBOC) and hawkish comments overnight by the European Central Bank’s president, which caused a sell-off in dollars.

Traders speculated that bullish remarks from Mario Draghi about the euro zone’s performance, which sent the euro rocketing higher against the dollar overnight, was seized by the PBOC as an opportunity to intervene in the currency spot markets and cause a sell-off in dollars to support the yuan.

Draghi hinted that crisis-era stimulus measures were to end, triggering markets to vigorously reprice euro-zone assets and causing investors to pile into the euro and German yields to shoot higher.

Offshore yuan rose 0.2 per cent to 6.8020 per dollar on Wednesday after surging 0.64 per cent yesterday, its biggest increase since March 15. Onshore yuan also gained 0.2 per cent, to 6.7987, after climbing the most in a month yesterday.

Mizuho Bank said in a research note that yesterday’s spike in the yuan was due to suspected foreign exchange intervention by the central bank, and signalled official determination to support the currency at around the 6.80 level ahead of the launch of the bond connect scheme on July 1 to mark the 20th anniversary of Hong Kong’s handover.

Tuesday’s surge in onshore and offshore yuan was merely the Chinese currency catching up with previous gains seen in other Asian currencies, analysts said.

Depreciation pressure in the yuan has been creeping back again in recent weeks despite the PBOC taking action and engineering a rally in the currency at the end of May.

As investors and traders still doubt the yuan’s strength, the pattern of central bank intervention triggering an artificial spike in the currency followed by yuan depreciation pressure returning to the market, is expected to continue into the forseeable future, Scotiabank said in a research note.

Earlier in the day, the PBOC raised the yuan’s mid-point rate to 6.8053, stronger by 239 basis points, or 0.35 per cent, than Tuesday’s 6.8292. It marked the biggest increase in the daily fixing rate in a month.

The euro firmed against the US dollar, up 0.2 per cent to US$1.1363 while the yen gained 0.1 per cent to 112.17 per dollar.

Additional reporting by Shidong Zhang