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China’s yuan firms, supported by surging costs of borrowing in Hong Kong

Taking a cue from the yuan strength in the offshore market, China's central bank fixed a stronger midpoint for the the yuan, but the currency came off early highs as mainland banks and corporates seized the opportunity to buy dollars.

By: | Shanghai | Published: September 19, 2016 12:13 PM
The spot yuan opened at 6.6609 per dollar, before easing to 6.6688 at midday, but it was still 46 pips stronger than the previous late session close and 0.15 percent firmer than the midpoint. (Source: Reuters) The spot yuan opened at 6.6609 per dollar, before easing to 6.6688 at midday, but it was still 46 pips stronger than the previous late session close and 0.15 percent firmer than the midpoint. (Source: Reuters)

Taking a cue from the yuan strength in the offshore market, China’s central bank fixed a stronger midpoint for the the yuan, but the currency came off early highs as mainland banks and corporates seized the opportunity to buy dollars.

The People’s Bank of China set the midpoint rate at 6.6786 per dollar prior to market open, firmer than the previous fix 6.6895.

The spot yuan opened at 6.6609 per dollar, before easing to 6.6688 at midday, but it was still 46 pips stronger than the previous late session close and 0.15 percent firmer than the midpoint.

“Corporates’ willingness to purchase dollar is very strong today, which drove the yuan a bit softer in intraday trade. And we will see stronger dollar purchase in the next few days as we are approaching the end of the month,” said a trader at a foreign bank in Shanghai. The onshore yuan has firmed since last week as elevated offshore yuan borrowing rates due to a liquidity shortage had raised the cost of shorting the Chinese currency.

The CNH Hong Kong Interbank Offered Rate benchmark (CNH Hibor), set by the city’s Treasury Markets Association, was fixed at 23.683 percent for overnight contracts on Monday, the highest level since Jan. 12.

“Normal lenders of the yuan, like Chinese banks, have refrained from injecting liquidity into the market recently,” said a trader at a local bank in Hong Kong. He said seasonal reasons including national holidays would also drain yuan liquidity from the market. Chinese National Day holiday will start from Oct.1, and it will last a week.

The trader also suspected the central bank would favour keeping the offshore yuan on the stronger side in the run-up to Oct. 1, when yuan will be included for the first time in a basket of major currencies that make up the value of the International Monetary Fund’s Special Drawing Rights.

Traders said borrowing rates are likely to remain elevated till the end of this month unless the policymakers decide to add more liquidity to the market.

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