(Bloomberg) — China is stepping up its defense of the yuan, driving up funding costs in the offshore market to pressure short positions and set a new record with a stronger-than-expected reference rate for the currency.
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Analysts say the moves are designed to slow the pace of the yuan’s depreciation rather than engineer a sustained appreciation. Forecasters at JPMorgan Chase & Co. and Nomura Holdings Inc. And UBS Wealth Management further weakened the currency this year. The offshore yuan fell on Tuesday, tumbling towards a 2023 low last week.
The People’s Bank of China set its daily fix for the yuan at 7.1992 per dollar, compared to the average estimate of 7.3103 in a Bloomberg survey. This was the largest gap since opinion polls began in 2018.
The record positive bias for reform came a day after the one-month yuan forward points, a measure of the cost of borrowing the currency against the dollar, rose by the most in offshore trading since 2017. Funding costs have risen in recent days as local banks have refrained from providing more currency in the past year. Barter market, according to traders. Rising financing costs make betting on the yuan more expensive for speculators.
Read more: CNH Hibor Increases Amid Rare Offshore Liquidity Pressure
China’s currency has been under pressure for months as the economy suffers, and interest rate cuts by the People’s Bank of China (PBOC) have widened the yield differential with the US. While China’s central bank is easing its monetary policy, it is also trying to slow the yuan’s decline through stronger-than-expected pegs, dollar sales by state banks, and measures such as adjusting rules on capital inflows.
The two strategists at Citigroup Inc. wrote: Philip Yin and Gaurav Garg in client note: “CNH financing lobbying may be a tactical tool and signal transmitter, but it is unlikely to be a go-to tool in isolation.” “It will have to work with other FX instruments. In general, the combination of rate cuts and other forex instruments suggests that yuan weakness driven by fundamentals is tolerated but the pace is managed.”
The People’s Bank of China sold 35 billion yuan ($4.8 billion) of securities in Hong Kong on Tuesday, surpassing the 25 billion yuan of securities outstanding this month. It was the first time the central bank has refrained from a hard extension in two years, according to data compiled by Bloomberg. The yield on the three-month treasury bills was the highest since 2018.
The other parts of the front curve are also raised. Tomorrow’s Next Score climbed to the highest level since May 2022 on Monday, while the 12-month period rose to a three-month high. The offshore interbank interest rate on Hong Kong’s one-month yuan, known as the CNH Hibor, jumped more than 2% on Tuesday to the highest level since 2018.
The rally in forwards comes after some paydays fell to record lows in recent months, weighed by the yield divergence between the United States and China. The two-year US Treasury yields about 290 basis points more than Chinese government bonds of similar maturity, the widest spread since 2006.
Xiaojia Zhi, chief China economist at Credit Agricole CIB in Hong Kong, said the drain on external liquidity may put pressure on short positions, but it will also undermine the long-term policy intention to internationalize the yuan. This latest move demonstrates that “the PBOC is intolerant of rapid one-way moves and will consider various collection tools to discourage speculative flows of CNY depreciation and forecast management,” she said.
– With help from Ye Xie and Ran Li.
(Updates with auction results)
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