China’s yuan held onto its gains after a two-day rally on Friday as borrowing rates for its offshore component soared and the central bank set a stronger guidance rate for the currency, signaling no respite in official efforts to contain speculation.
Both the onshore and the offshore yuan have been rallying this week, driven predominantly by a blow-up in yuan borrowing costs offshore and tighter liquidity. Chinese authorities are keen to deter speculation in the currency and analysts and traders suspect policymakers have sought to prevent it from weakening to the 7-per-dollar level ahead of U.S. President-elect Donald Trump’s inauguration on Jan. 20.
The People’s Bank of China (PBOC) set the official midpoint for the yuan, which is allowed to move in a tight band around that guidance rate, at 6.8668 per dollar prior to the market opening, 639 pips or 0.9 percent, firmer than the previous fixing. That made it the largest upward move since the yuan was revalued and taken off a fixed dollar peg in July 2005.
By 0415 GMT, the currency was trading at 6.9103 to the dollar, down 0.4 percent from late Thursday but about 1 percent up from Tuesday’s close, the first trading day of the year. The currency was on track to log its best week since July 2016. While Chinese authorities may have some success in the short-run in arresting the yuan’s descent, pressure will remain on the yuan to depreciate over time, traders and analysts said. “I don’t think the volatility in the yuan so far this week will reverse the trend of depreciation. But the yuan is at least unlikely to have another rapid fall ahead of the Lunar New Year,” said a Shanghai-based trader at a foreign bank.
