Offshore Yuan Rebounds From Five-Year Low on Intervention Bets

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  • PBOC said to suspend some banks' cross-border yuan business
  • Onshore rate to weaken 3.1 percent by end-2016, survey shows

The offshore yuan traded in Hong Kong rebounded from a five-year low, spurring speculation that the central bank intervened to pare its discount to the rate in Shanghai.

The freely traded currency was little changed at 6.5747 a dollar as of 5:08 p.m. in Hong Kong, according to data compiled by Bloomberg, having been down 0.5 percent less than an hour earlier. The spot rate in Shanghai lost 0.08 percent to close at 6.4902, according to China Foreign Exchange Trade System prices.

A widening offshore-onshore gap has made it increasingly profitable to buy the currency in Hong Kong and sell it in Shanghai. The People’s Bank of China has suspended at least two foreign lenders from conducting some cross-border yuan operations until late March, according to people with direct knowledge of the matter. The monetary authority has also extended the onshore yuan’s trading hours to 11:30 p.m. in Shanghai effective Jan. 4 in a move that will provide a reference for trading outside of Asia hours.

“The sharp recovery in the offshore yuan was likely due to central bank intervention to narrow the yuan gap," said Andy Ji, a Singapore-based currency strategist at Commonwealth Bank of Australia. “The onshore yuan trading session extending into London hours may be able to converge the spread, and the central bank can still take administrative measures to curb arbitrage activities.”

Intervention Chances

The PBOC may intervene in the offshore yuan market to defend the 6.60 per dollar level, Zhou Hao, an economist at Commerzbank AG in Singapore, said earlier. The authority is unlikely to allow the gap between the offshore and onshore yuan to stay persistently above 1,000 so-called pips because it hurts sentiment, he added. The spread is now around 845 pips, compared with more than 1,200 before Wednesday’s suspected intervention.

The central bank has become more hands-off of late and allowed a "significant depreciation" in December, Malayan Banking Bhd. strategists led by Saktiandi Supaat wrote in a note dated Tuesday. The monetary authority has tolerated a 1.4 percent drop in the onshore currency this month, after propping up the exchange rate in the weeks leading up to the International Monetary Fund’s Nov. 30 decision to grant the yuan reserve status.

The nation’s manufacturing sector probably contracted for a fifth straight month in December, according to the median forecast in a Bloomberg survey. The official purchasing managers index is due to be released by the National Bureau of Statistics on Jan. 1. Gross domestic product growth will slow from an estimated 6.9 percent this year to 6.5 percent next year, according to another Bloomberg survey.

The PBOC lowered its reference rate by 0.05 percent on Wednesday to 6.4895, the weakest since May 2011. The yuan in Shanghai will probably drop 3.1 percent by the end of 2016, according to the median forecast in a Dec. 18-25 Bloomberg survey.