The overnight yuan interbank rate in Hong Kong surged to a five-month high as banks set aside cash for regulatory requirements and on speculation authorities are tightening funding conditions to curb declines in the currency.
The yuan weakened to a five-year low last week on expectations policy makers are seeking a further drop as the U.K.’s vote to leave the European union weighs on China’s export outlook. Borrowing costs are rising also because lenders have to comply with a reserve requirement rule on yuan deposits held on the mainland at offshore participant banks, said Frances Cheung, head of Asia ex-Japan rates strategy at Societe Generale SA in Hong Kong. Such a requirement was imposed in January to make speculative bets against the yuan costlier.
The overnight interbank rate surged 2.46 percentage points to 4.83 percent, the highest since Feb. 22, according to a fixing from the Treasury Markets Association. The one-month rate jumped 42 basis points to a four-month high of 3.14 percent.
"As yuan depreciation pressures have intensified again recently, regulators may tend to tighten offshore yuan liquidity to slow declines," said Becky Liu, a rates strategist at Standard Chartered Plc in Hong Kong.
The offshore overnight yuan rate jumped to a record 66.8 percent in January as the People’s Bank of China mopped up supply of the currency in an effort to punish speculators who take advantage of the difference in the yuan’s rates at home and abroad. The offshore yuan was little changed at 6.6971 a dollar as of 4:32 p.m. in Hong Kong, paring its gain for the day after data showing a third monthly decline in exports.