China’s yuan closed down against the dollar for the fifth session on Thursday while the offshore market accelerated away from the onshore rate, putting the Chinese central bank’s ability to hold the exchange rate stable in question.
The onshore yuan closed at 6.4378 per dollar, its lowest closing level in more than four years. The offshore yuan fell more sharply, 1.3 percent weaker than the onshore spot to around 6.52 per dollar.
The CNH has lost 1.6 percent in just five trading days and looked set to end the Asian trading day at its weakest against the dollar since 2011. It was around 10 basis points cheaper than the onshore rate.
Zhou Hao, economist at Commerzbank in Singapore, said that offshore traders, who are more inclined to trade derivatives, were rapidly unloading yuan positions in reaction to the central bank’s behavior in the onshore market, specifically its decision to steadily lower its daily midpoint guidance rate.
Prior to the market open on Thursday, the People’s Bank of China (PBOC) set the midpoint rate at 6.4236 per dollar, its lowest level in more than four years for the second day.
NO LONGER GUIDING?
The PBOC has also set the fix more closely to the previous day’s close, suggesting it is no longer trying to guide the onshore market but rather follow it.
“The central bank has let the fix (the midpoint) go. So that delivered a very clear signal to the offshore market that the renminbi will depreciate,” Zhou said, adding that heavy use of derivatives offshore tends to produce more volatility there.
“It’s very clear that (officials) want to see monetary policy easing, which implies a weak currency,” he said. “But the offshore market now appears to be a bit more out of control. The expectation of further renminbi depreciation is far more intense than the PBOC expected.”
Prior to the admission of the yuan into the International
Monetary Fund’s currency basket in November, the PBOC had held the onshore and offshore markets closely together. Some analysts saw this as a response to criticism that the wide margin between the two represented a major risk for foreign investors. However, HSBC economists argued in a research note that the
PBOC, by granting SDR member central banks direct access to its onshore market, had relieved the IMF’s concerns. More depreciation of the yuan is justified because it is occurring as other currencies also fall against the dollar, HSBC said.
“The RMB is becoming over-valued again in trade-weighted terms,” they wrote, as other neighboring economy currencies also slide against a rampant dollar.
GAP SEEN UNSUSTAINABLE
Not everyone believes the wide gap between onshore and offshore markets will be sustainable.
“When it comes to the divergence between the onshore and offshore market, I think the PBOC will keep eyes on the track,” said Mitul Kotecha, an FX strategist at Barclays in Singapore. A trader at a foreign bank in Shanghai said the domestic market anticipated more slides to come.
“Still, the central bank can step in and curb the currency’s loss at any time it wants,” the trader said. A Reuters survey this week of fund managers, currency traders and analysts found that bearish bets on the yuan hit the largest level since April 2010.