China's yuan firms, bond yields rise after PBOC raises short-term rates

[SHANGHAI] China's yuan firmed against the US dollar on Friday, the first day of trade after a week-long break for the Lunar New Year as the central bank surprisingly raised short-term interest rates - piling pressure on the bond market.

The People's Bank of China set the midpoint rate at 6.8556 per US dollar prior to market open, firmer than the previous fix 6.8588.

The slight strengthening of the midpoint followed a slipping in the US dollar over the past week when financial markets in China were shut down for the Lunar New Year holiday.

The index of the US dollar, versus six other major currencies stood at 99.966 at midday, but was on track to shed 0.6 per cent for the week in which it fell as far as 99.233, its lowest since late November.

Spot yuan was below midpoint in morning trade as banks' clients rushed to purchase relatively cheap US dollars after the long holiday, traders said.

The spot market opened at 6.8650 per US dollar and was changing hands at 6.8708 at midday, more than 0.2 per cent softer than the midpoint but 99 pips firmer than the previous late session close on Jan 26.

The People's Bank of China (PBOC) surprised markets by raising short-term interest rates, in a further sign that it is slowly moving to a tighter policy bias as the economy shows signs of steadying.

The PBOC said it raised the interest rate on reverse repurchase agreements (repos) in open market operations by 10 basis points, effective on Feb 3.

Two banking sources also told Reuters the PBOC had also raised the rates on its standing lending facility (SLF) short-term loans.

Some analysts said the adjustment in the interest rates was also Beijing's latest attempt to alter expectations of a one-way path for the yuan.

"It's common knowledge that they (PBOC policymakers) want to keep the yuan on this weakening path. A one-off revaluation is openly discussed, though I don't think they'll do it, but maybe they're trying to achieve it with policy adjustments here and there," said Bart Wakabayashi, head of Hong Kong fx sales at State Street Global Markets.

Bond prices edged down immediately after the adjustment was made.

The most-traded 10-year treasury futures contract for June delivery lost 0.9 per cent at midday, after falling as much as 1.5 per cent at one point in early trade.

Yields on 10-year Chinese treasury bonds stood at 3.392 per cent at midday, after hitting a high of 3.450 per cent in early trade.

The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 95.54, firmer than the previous day's 95.48.

The offshore yuan was trading 0.73 per cent away from the onshore spot at 6.8211 per US dollar.

Offshore one-year non-deliverable forwards contracts (NDFs), considered the best available proxy for forward-looking market expectations of the yuan's value, traded at 7.1165, 3.67 per cent weaker than the midpoint.

One-year NDFs are settled against the midpoint, not the spot rate.

REUTERS