Yuan rate up as Beijing 'takes action'
CHINA'S yuan shot higher in offshore markets yesterday on suspected intervention by Chinese state banks, putting the offshore rate on track for its biggest daily gain on record.
The intervention caught the market wrong-footed and was seen by traders as another bold gesture by the Chinese authorities to shake out speculators and dampen expectations for further depreciation in the yuan, following its devaluation last month.
The offshore yuan spot rate strengthened more than 1 per cent to 6.39 per dollar from 6.4698 earlier in the day, as the suspected intervention prompted those betting on yuan depreciation to cover their positions. Offshore traded volumes spiked as much as 10 times their monthly average, Thomson Reuters data showed.
The jump took the offshore yuan rate to its strongest level since early last month when the central bank surprised markets by devaluing the currency nearly 2 per cent.
"The big picture is that policy makers are doing everything they can do to dampen expectations that the yuan will depreciate much," said Mark Williams, an economist at Capital Economics in London. "There's been rumours before of state entities acting on behalf of the central bank offshore. It shows that policymakers are unwilling to relax control of key variables that now include the offshore currency."
As a result of the intervention, the long-standing spread between the onshore and offshore rates narrowed sharply, while dollar currency forwards dropped.
The wide gap had implied that offshore markets were pricing in further depreciation in the currency, an expectation China has been trying to suppress.
While the central bank can guide the currency onshore by setting a daily reference rate, the offshore market is not bound by that marker.
The cost of keeping the yuan firm against the dollar, even as neighbouring currencies have depreciated, has been expensive for Beijing, leading to a record drop in the country's foreign exchange reserves last month of close to US$100 billion (S$142 billion).
This was a major reason behind the devaluation last month, analysts have said.
The offshore yuan discount to the onshore yuan spot market narrowed to 0.47 per cent after the suspected intervention, from 1.56 per cent on Wednesday.
"In the very extreme moment of the buying, we saw a rare reverse market quote in the Chinese currency which is an indicator that the buyers wanted to push up the value of the yuan at any cost," said the head of local currency trading at a United States bank in Hong Kong.
A "reverse market quote" refers to when the bid price is higher than the offer price, which traders said pointed to intervention.
"There are some Chinese banks steadily buying large amounts of yuan," said a trader at an Asia commercial bank in Hong Kong. "But even if it is intervention by the central bank, I don't think it will change the expectation on the depreciation of the yuan."
Onshore traders in the past have said the central bank often instructs major state-owned banks to intervene onshore, buying or selling yuan to control the market exchange rate. Traders said a sharp depreciation in the yuan early last year was engineered by the central bank to shake out speculators.
Traders said they believe the central bank intervened strongly in the onshore market in the run-up to the devaluation last month, causing intraday price volatility to evaporate. But since the devaluation, strong depreciation pressure has been in evidence in forwards markets and the offshore spot market.