[SHANGHAI] China's yuan firmed on Wednesday as banks sold US dollars amid elevated borrowing cost in the offshore yuan market in Hong Kong.
The CNH Hong Kong Interbank Offered Rate benchmark (CNH Hibor), set by the city's Treasury Markets Association, was fixed at 8.16167 per cent for overnight contracts on Wednesday, the highest level in seven months.
Traders said the elevated offshore yuan borrowing rates in the past few days had raised the cost of shorting the Chinese currency.
"The surge in the offshore CNH HIBOR affected the onshore market today, and it forced onshore banks to sell dollars," said a trader at a Chinese bank in Shanghai.
The People's Bank of China set the midpoint rate at 6.6895 per US dollar prior to market open, weaker than the previous fix at 6.6726.
The spot market opened at 6.6766 per US dollar and was changing hands at 6.6710 at midday, 88 pips firmer than the previous session close and 0.28 per cent stronger than the midpoint.
"The midpoint was quite weak today, but some banks' unexpected dollar sales have pulled the yuan to levels around 6.67 per US dollar," said another Shanghai-based trader at a Chinese bank.
Traders noted the official guidance midpoint had only marginal impact on spot yuan prices this week.
Zhou Hao, senior emerging market economist at Commerzbank in Singapore, said in a note on Wednesday that overnight cost of funding surged as a result of tight liquidity in the offshore yuan market.
China's financial markets will be closed from Thursday, Sept 15, through Sunday, Sept 18, for the Mid-Autumn Festival. And they will resume on Monday, Sept 19.
The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 95.31, firmer than the previous day's 94.82.
The global dollar index fell to 95.587 from the previous close of 95.633.
The offshore yuan was trading 0.08 per cent weaker than the onshore spot at 6.6761 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 6.873, 2.67 per cent weaker than the midpoint.
One-year NDFs are settled against the midpoint, not the spot rate.