Yuan in Hong Kong Gains as Offshore Borrowing Costs Deter Bears

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The yuan traded in Hong Kong strengthened on speculation that relatively high offshore borrowing costs are keeping some investors from making bearish bets on the currency.

The overnight Hong Kong interbank offered rate for the yuan reached the highest in almost seven months on Tuesday, before the People’s Bank of China cut benchmark interest rates for the fifth time since November. The one-week yuan rate in the city was at 4.39 percent on Thursday and has averaged 3.78 percent in the past year.

“Short-term offshore interest rates have been too high, squeezing some short yuan positions,” said Tommy Ong, managing director for treasury and markets at DBS Bank Hong Kong Ltd. “Onshore interest rates will stay lower than those in Hong Kong as the PBOC is going to ease monetary policy further.”

The freely-traded offshore yuan rose 0.17 percent to 6.4767 a dollar as of 4:55 p.m. in Hong Kong, according to data compiled by Bloomberg. In Shanghai, the currency gained 0.08 percent to close at 6.4053, according to China Foreign Exchange Trade System prices. The onshore spot is allowed to trade as much as 2 percent on either side of the PBOC’s reference rate, which was cut to 6.4085, the weakest since August 2011.

China has cut its holdings of U.S. Treasuries this month to raise dollars needed to support the yuan in the wake of a shock devaluation earlier this month, according to people familiar with the matter.

The PBOC on Tuesday reduced its one-year lending and deposit rates by 25 basis points each to 4.6 percent and 1.75 percent, respectively. It will lower the reserve-requirement ratio by 50 basis for all lenders effective Sept. 6. Malayan Banking Bhd. estimates the central bank will cut the RRR by another 100 basis points and its benchmark rates by 50 basis points before the end of this year.

‘Downside Pressure’

Major Chinese banks have sold dollars in the onshore yuan market on most days since the PBOC devalued the currency on Aug. 11. The central bank added a net 60 billion yuan ($9.4 billion) to the financial system this week as the authority’s yuan purchases drained domestic money supply.

“Further reserve-ratio cuts would continue to keep downside pressure on the yuan,” Maybank analysts including Saktiandi Supaat and Fiona Lim wrote in a note Thursday. They predict the onshore Chinese currency will weaken to 6.65 per dollar by the second quarter in 2016.

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