Hibor surges to 7-month high ahead of Mid-Autumn Festival

Some traders suggest PBOC targeting yuan shorts, while others say jump shows a lack of liquidity, as banks work to keep yuan reserves at safe levels

PUBLISHED : Wednesday, 14 September, 2016, 12:30pm
UPDATED : Wednesday, 14 September, 2016, 10:59pm

The borrowing cost of offshore yuan in Hong Kong’s interbank market surged sharply again on Wednesday, reaching the highest level in seven months ahead of the Mid-Autumn Festival.

The overnight Hong Kong Interbank Offered Rate for offshore yuan, or CNH Hibor, rose 5.32 percentage points to 8.16167 per cent from Tuesday’s 2.838 per cent, according to Treasury Markets Association data.

It is highest level of offshore yuan Hibor since February 19, after it hit a seven-month high of 5.5155 per cent on Monday.

Various theories emerged among currency traders to explain the abnormal movement of CNH Hibor, according to Jasper Lo, chief executive of King International.

Some suggested the rise was a sign of The People’s Bank of China (PBOC), the central bank, intervening in the market to threaten short sellers against the yuan, with a US dollar on a rise amid increasing odds of an interest rate rise as stock markets continue to be weak.

A rise of Hibor increases the cost of borrowing the currency for short sellers, and dampens speculation activity.

“It’s possible that the PBOC wants to deter short-selling activities during the festival,” Lo said.

Stephen Innes, senior trader at Oanda Pacific, said earlier in the week that the PBOC might want to maintain the “line in the sand” of offshore yuan at 6.70 per dollar and thwart speculation before the yuan’s official inclusion in the Special Drawing Rights basket of International Monetary Fund in October.

It’s possible that the PBOC wants to deter short-selling activities during the festival
Jasper Lo, chief executive of King International

Lo added that some traders believe the jump in Hibor shows a lack of liquidity ahead of Mid-Autumn Festival, as banks work to keep their yuan reserves at safe levels.

Another possibility to emerge, is the central bank was withdrawing the yuan to the onshore market after a rise in maturing one-year forward positions, to cushion the currency’s drop last year.

The bounce in the Hibor pushed up the value of the currency.

The onshore yuan in Shanghai closed 89 basis points stronger to 6.6767 per dollar at 4.30pm. The offshore yuan strengthened 0.22 per cent or 150 points to 6.6755 at 6pm, with the onshore yuan standing at 6.6731 at the same time.

The People’s Bank of China on Wednesday set the yuan reference point against the US dollar at 6.6895, 169 basis points or 0.25 per cent weaker than on Tuesday.

The yuan could face appreciation pressure short term if US interest rates do not rise in September, and Lo added the next technical level for offshore yuan is 6.62 per US dollar.

Longer term, the currency is still on its depreciation channel to 6.9 against the greenback, he said.

Liquidity has been especially tight as everyone is still waiting for more guidance in the Fed funds rate path, Innes added.

“The conditions will probably remain as such through to next week’s Federal Open Market Committee meeting.”