China Fireworks Continue With Yuan’s Biggest 4-Day Rally In 12 Years

China’s unprecedented crackdown against Yuan shorts continued overnight, when the FX market saw even more fireworks as the onshore yuan headed for the biggest four-day advance since 2005 following the strongest central bank fixing since January and amid ongoing speculation China’s central bank is trying to crush shorts while China’s big banks continue to limit offshore liquidity.

The onshore Yuan rose 0.18% to 6.8062, extending the four-day gain to 1.2%, as of late trading in Shanghai. At one point in the session, the Yuan rose as much as 6.79, the most since July 2005, when China ended a peg to the dollar, according to Bloomberg.Earlier, the People’s Bank of China strengthens its reference rate by 0.79% to 6.8090 from 6.8633, the most since January. According to trader, the PBOC continues to use the fixing to guide the exchange rate higher, and both the onshore and offshore yuan will remain strong in the short term; Kenix Lai, an FX analyst at Bank of East Asia told Bloomberg that Thursday’s reference rate was stronger than what the bank’s model suggests. The gap between the onshore and offshore yuan rates narrowed modestly to 0.7%, after widening to 1% on Wednesday.

Meanwhile, the internals suggest that the move is not over as onshore yuan 12-month non-deliverable forwards gain for a seventh day, advancing 0.04% to 6.9785, while CNY 1-month volatility rises 8 basis points to 3.82%.

Separately, Bloomberg’s replica of CFETS index, which tracks the yuan against 24 currencies, climbed 0.6% to 92.96, this was the biggest advance since the index was expanded.

The moves in the offshore markets were even more dramatic, with the CNH fluctuating between early gains and leading to subsequent losses; last trading 0.3% weaker at 6.76041 per dollar after earlier rising to a seven-month high. The impact of the PBOC’s direct intervention meant the USD/CNH one-month risk-reversal options volatility fell to -0.1075, indicating options to sell the yuan against the dollar cost less than the options to buy: this was the first time this has happened since 2011.