Offshore yuan set for biggest weekly gain as China bears down on speculators

Fri Jan 6, 2017 4:32am EST
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By Winni Zhou and John Ruwitch

SHANGHAI (Reuters) - China's offshore yuan pared some of its sharp gains racked up this week, but is still on course for its biggest weekly rise after Beijing was suspected of pushing up overnight borrowing costs to discourage bearish bets on the currency.

Both onshore CNY=CFXS and offshore yuan CNH=D3 have been rallying, driven predominantly by a blow-up in yuan borrowing costs offshore and tighter liquidity. The spread between the two spot rates widened to its highest since 2010.

Chinese authorities are keen to deter speculation in the currency and traders suspect policymakers have sought to prevent it from weakening to the 7-per-dollar level, ahead of U.S. President-elect Donald Trump's inauguration on Jan. 20.

Traders said the market had long held a strong "one-way" expectation of depreciation in the yuan and the rally in the currency over the week was the authorities' attempt to alter such views.

It is not clear if Chinese authorities have engineered the spike in yuan borrowing rates in Hong Kong this week. But they had used such a tactic before to support offshore yuan exchange levels and by extension relieve some of the pressure on the yuan onshore, which is trading at more than eight-year lows.

But while policymakers may have some success in the short-run in arresting the yuan's descent, pressure will remain on the yuan to depreciate over time, they said.

"I don't think the volatility in the yuan so far this week will reverse the trend of depreciation. But the yuan is at least unlikely to have another rapid fall ahead of the Lunar New Year," said a Shanghai-based trader at a foreign bank, referring to the week-long holiday starting at the end of January.

The People's Bank of China (PBOC) set the official midpoint CNY=PBOC for the yuan, which is allowed to move in a tight band around that guidance rate, at 6.8668 per dollar prior to the market opening, 639 pips or 0.9 percent, firmer than the previous fixing.   Continued...

A 100 yuan note is seen in this illustration picture taken in Beijing March 7, 2011.  REUTERS/David Gray/File Photo