China strengthened the yuan reference rate that determines the range within which the currency can trade by 0.9%, the most since Beijing abandoned the US dollar peg in favor of a crawling peg in July 2005, agencies reported.
The yuan’s recovery marks a victory for China’s policymakers who have been pouring foreign exchange reserves into the market to prop up the currency and prevent a destabilizing collapse. Many currency bears betting that a slowing Chinese economy means a further devaluation is inevitable have been caught on the wrong side of the stronger currency, Bloomberg said. Short sellers needing to roll over their bets were hit by soaring borrowing costs: the odds of the onshore yuan breaching the psychologically important support of 7 yuan per US dollar slumped to 36% from 65% two days ago based on options prices, the news agency said.
The central bank set the reference rate at 6.8668, following a record two-day rally in the offshore yuan. The CNH Hong Kong interbank offered rate benchmark, set by the city’s Treasury Markets Association, surged again to 61.333000% on Friday after having climbed to 38.33500% for overnight contracts on Thursday, the highest since January 12, 2016. It was 16.94767% on Wednesday.
With signs of short-term liquidity stress, the implied overnight deposit rate for the offshore yuan soared as high as 101.694% on Thursday. While yuan short sellers may be feeling squeezed, holders of the yuan in Hong Kong are getting early Lai See bonuses from the interest rate spike.
“One-month time deposits for yuan are being printed at around 8% in the offshore market,” said the head of sales for fixed income at a Chinese bank in Hong Kong, who declined to be identified. “It is amazing how tight offshore liquidity is and the early arrival of Chinese New Year for 2017 clearly doesn’t help.”
The yuan is limited onshore to trading within a 2% band on either side of the reference rate set each day by the central bank. But offshore, it can move more freely, which accounts for the different exchange rates, Reuters said. The onshore yuan was trading around 6.9133 at 2pm in Beijing on Friday. Offshore rates were 6.8143 in Hong Kong, gaining 2.2% already against the US dollar so far in 2017.