Yuan Erases Losses in Hong Kong on Suspected PBOC Intervention

  • Chinese bank placed "sizable bid" for currency, analyst says
  • Offshore yuan's discount to onshore rate doubled this month

The yuan rebounded from early losses in Hong Kong’s offshore market, spurring speculation Chinese policy makers are propping up the currency after its discount to the onshore spot rate doubled.

The yuan was trading 0.05 percent stronger at 6.5280 a dollar as of 4:33 p.m. in Hong Kong, after sliding as much as 0.19 percent, according to data compiled by Bloomberg. It erased the drop within 15 minutes of reaching the day’s low. In Shanghai’s onshore market, the yuan fell for a ninth day, the longest run of losses since at least 2007, to close at a four-year low of 6.4733.

A major Chinese bank placed a "sizable bid" for yuan at around 6.53, triggering the rebound in the offshore rate, said Ryan Lam, Hong Kong-based head of research at Shanghai Commercial Bank Ltd. "Trading will be thinner around Christmas, which means the People’s Bank of China can achieve its goal even with small-scale interventions."

China’s efforts to prop up the currency appeared to have been scaled back since the start of December, after it won reserve status at the International Monetary Fund, and this spurred bets on further depreciation. The nation’s foreign-exchange reserves tumbled by more than $200 billion over the last four months as the PBOC bought yuan to stabilize the exchange rate following a surprise devaluation in August.

The gap between the yuan’s rates at home and overseas exceeded 0.08 a dollar -- 800 so-called pips -- prior to Wednesday’s suspected intervention. The rebound in Hong Kong closed the gap to around 540 pips and Lam said he expects policy makers to ensure the spread doesn’t exceed 1,000. The difference has averaged about 675 pips this month, compared with 300 in November.

Twelve-month non-deliverable forwards for the yuan traded at a 4.9 percent discount to the onshore spot rate on Dec. 11, the biggest gap in more than three months. An Aug. 24 spread of 5 percent was the largest since late 2008, at the height of the global financial crisis.

“The bearish sentiment in the yuan spot and forwards market is near extreme levels, reflecting market herd behavior,” Roy Teo, a Singapore-based strategist at ABN Amro Bank NV, wrote in a note on Tuesday. "We expect the central bank to punish speculators betting that the depreciation of the yuan is a one-sided bet. We suspect that the PBOC has resumed its intervention activities to defend weakness in the offshore yuan, resulting in offshore yields spiking higher."

Yuan Fixing

The PBOC cut the yuan’s reference rate for the eighth day in a row to the weakest level since July 2011. This followed the PBOC’s move on Friday to play down the currency’s recent losses by saying its performance shouldn’t be measured against the dollar alone. The onshore spot rate can only trade as much a 2 percent on either side of the daily fixing. 

Financial institutions including the PBOC sold 221 billion yuan ($34 billion) of foreign exchange in November, a sign of capital outflows, data showed Tuesday. To help stem the exodus of funds China has introduced measures including a halt to offshore bank borrowing from the mainland through bond repurchases and a suspension of new applications under the Renminbi Qualified Domestic Institutional Investor program, which allows yuan from the mainland to be used to buy offshore securities denominated in the Chinese currency. The initiatives helped push Hong Kong’s interbank offered rate for the yuan to the highest since September this month.

Emerging-market currencies, including the yuan, are facing increased depreciation pressure as the Federal Reserve prepares to raise interest rates for the first time since 2006. There’s a 76 percent chance the U.S. central bank will tighten policy at its Dec. 15-16 meeting, futures contracts show.

A rebound in the offshore yuan accompanied by a spike in funding costs may be a "Christmas surprise" as dollar gains slow after the Federal Reserve meets this week, Morgan Stanley strategists led by Kewei Yang wrote in a note on Tuesday. The current market position is very one-sided in shorting the offshore yuan and liquidity will be thinner around the holidays, they said.

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