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China's yuan firms, supported by elevated borrowing costs in Hong Kong

Wednesday, October 12, 2016 - 13:40
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China's yuan firmed slightly against the US dollar on Wednesday, despite a weaker central bank fixing, supported by strength in the offshore market in Hong Kong.

[SHANGHAI] China's yuan firmed slightly against the US dollar on Wednesday, despite a weaker central bank fixing, supported by strength in the offshore market in Hong Kong.

The yuan was guided by the central bank towards a fresh six-year low against the US dollar on Wednesday, but the spot rate rose in early trade, thanks to elevated offshore yuan borrowing rates that pushed the cost of shorting the Chinese currency higher.

Hong Kong's overnight yuan borrowing rate was fixed at 2.82838 per cent on Wednesday, the highest level since Sept 21, while the one-week offshore tenor rose to 6.76103.

Traders said the rates rose because offshore yuan liquidity had tightened slightly. There was no sign of central bank or state bank intervention to move the market, however.

The higher borrowing costs forced offshore yuan investors to prop up the Chinese currency, and its spillover impact caused the yuan to strengthen to near the 6.72 level, traders said.

The People's Bank of China set the midpoint rate at 6.7258 per US dollar prior to market open, weaker than the previous fix 6.7098.

The spot market opened at 6.7222 per US dollar and was changing hands at 6.7180 at midday, 5 pips firmer than the previous late session close and 0.12 per cent firmer than the midpoint.

However, many in the market still believe the yuan would depreciate gradually against the US dollar to around the 6.8 level by the end of this year.

"The authorities are afraid that stronger speculation the yuan will weaken will encourage individuals to buy US dollars, and that US dollar demand is a bottomless pit," said a trader at a Chinese bank in Shanghai. He said demand for US dollars by companies was not a key factor in the market.

Traders and analysts said the government may feel compelled to signal the market to douse speculation that the yuan would continue to depreciate after the currency touched multiple lows over the past two days.

Some traders said if the yuan continued to soften they would be wary of possible intervention by the central bank.

The strengthening US dollar has contributed to the yuan's recent weakness both onshore and offshore. The global US dollar index fell to 97.506 from the previous close of 97.69.

The offshore yuan was trading -0.06 per cent away from the onshore spot at 6.7223 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 6.902, 2.55 per cent weaker than the midpoint.

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

REUTERS