- Overnight Hibor increases 15.7 percentage points on Monday
- Central bank seen shoring up currency before SDR inclusion
The overnight interbank yuan rate surged the most since January in Hong Kong amid speculation China’s central bank is intervening to fend off bearish bets on the currency.
The offshore yuan funding cost, known as Hibor, jumped 15.7 percentage points in its second-biggest gain on record to 23.7 percent, according to a fixing from the Treasury Markets Association. That’s the highest since January, when the People’s Bank of China was also suspected to be mopping up liquidity to boost the exchange rate. Funding conditions tightened on Monday even after the Hong Kong Monetary Authority said Thursday banks in the city had tapped its liquidity facilities.
The yuan stabilized this month as offshore funding costs climbed ahead of last week’s holidays and amid speculation the PBOC was engineering a squeeze. Such a crunch would help discourage short positions on the currency before the Federal Reserve’s review of monetary policy this week and the yuan’s entry into the International Monetary Fund’s basket of reserve currencies next month.
“The result is to support the currency at a time when 6.70 suddenly seems a very important line in the sand,” said Michael Every, Hong Kong-based head of financial markets research for Asia-Pacific at Rabobank Group. “You’d almost think it was a pegged currency.”
The currency weakened 0.24 percent to 6.6696 a dollar at 4:58 p.m. in Hong Kong, while in Shanghai the yuan gained 0.02 percent. The offshore rate fell due to the dollar’s recent strength, said Eddie Cheung, a foreign-exchange strategist at Standard Chartered Plc. A gauge of the greenback reached the highest since July on Friday as U.S. inflation quickened more than forecast, supporting the case for an interest-rate hike. Trading of the offshore yuan was less active on Friday as Hong Kong’s markets were shut for a holiday.
The PBOC strengthened the yuan’s fixing by 0.16 percent Monday even despite the dollar’s gains -- another sign stability is preferred before the U.S. and Japan both deliberate monetary policy this week.
A jump in yuan Hibor hurts bears in two ways: by increasing the cost to borrow the currency and sell it, and also by prompting lenders that want to avoid paying the higher rates to buy the yuan they need in the spot market instead, bolstering the exchange rate. The rate surged to a record 66.8 percent in January, prompting turmoil in local and global financial markets.
The three-month yuan interbank rate climbed 81 basis points in Hong Kong to 5.86 percent, the highest since February, while the one-month rate increased to an eight-month high.
The recent crunch was partly caused by the PBOC not rolling over its forward positions from last year, said Sue Trinh, Royal Bank of Canada’s Hong Kong-based head of Asian foreign-exchange strategy. Chinese banks were suspected to have sold dollar-yuan forwards last year at the PBOC’s behest, and now that these positions aren’t being extended, the lenders have to settle the contracts by delivering yuan.
“It is reasonable to say that the Chinese authorities are increasingly ‘de-sensitizing’ the yuan from external uncertainties and potential shocks from the Bank of Japan and Fed this week,” said Christy Tan, head of markets strategy in Hong Kong at National Australia Bank Ltd. Tight liquidity before Mid-Autumn Festival holidays last week and the weeklong break in October “provides an additional avenue for the Chinese authorities to maintain the squeeze and ward off speculative selling in the offshore yuan,” she added.
— With assistance by Justina Lee, and Tian Chen