China's yuan weakens after S&P downgrade, but offshore squeeze eases

[SHANGHAI] China's yuan weakened on Friday as a cut in the country's credit rating by S&P offset stronger-than-expected growth in China's March manufacturing activity.

The offshore yuan also slid more sharply, but signs of short-term liquidity stress in the offshore market evaporated, with the implied overnight deposit rate for CNH rising 0.726 per cent after tanking as much as -27 per cent on Thursday.

"Today the offshore yuan was hit by the S&P downgrade, while the onshore market mainly followed the PBOC's midpoint," said a trader at a Chinese commercial bank in Shanghai.

Traders said the phenomenon was largely due to Chinese banks dumping their CNH deposits into the market on the last day of the quarter in order to avoid having them included in new reserve requirement ratio calculations.

Offshore yuan traded in Hong Kong softened 0.1 per cent to 6.471 per dollar in late morning trade. If it closes at that level, it will mark its first daily weakening since March 25.

Rating agency S&P on Thursday cut its outlook for China's sovereign credit rating to negative from stable, but maintained the rating at AA-, saying the government's reform agenda is on track but likely to proceed more slowly than expected. S&P also downgraded the outlook for Hong Kong.

Activity in China's manufacturing activity unexpectedly expanded in March for the first time in nine months, an official survey showed on Friday, adding to hopes that downward pressure on the world's second-largest economy is easing.

The People's Bank of China (PBOC) set the midpoint rate at 6.4585 per dollar prior to market open, firmer than the previous fix of 6.4612, reflecting the overnight global weakness of the greenback.

The onshore spot market opened at 6.4620 per dollar and was changing hands at 6.4647 in late morning trade, weakening 0.24 per cent from the previous close.

The offshore yuan was trading 0.10 per cent weaker from the onshore spot in late morning trade.

On Thursday, the PBOC reported data on its positions in derivative holdings in forwards and futures in foreign currencies versus the yuan for the first time, but this had no immediate impact on yuan trading, traders said.

The move should help address appeals from investors and the International Monetary Fund (IMF) that the central bank cast more light on its derivative holdings, given allegations that it has been using currency swaps and other derivatives to intervene in the offshore market to support its currency.


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