One week ago, with the Yuan having traded within fractions of what many consider a key psychological level for the USDCNY at 6.70, we reported that as many traders expected that following the just concluded G-20 meeting in China, the PBOC would finally relent in its devaluation defense, and let the currency slide on through to the other side. Not only did that not happen, but last Thursday the Chinese Central bank unleashed an unexpected and aggressive attack on currency Yuan shorts, the biggest since the January devaluation scare when the cost of borrowing yuan in Hong Kong soared to a seven-month high amid. The overnight HIBOR, or Hong Kong Interbank Offered Rate, jumped – seemingly without reason – by 3.88% points to 5.45%, the most expensive since February, according to Treasury Markets Association data. Other tenors joined with the one-week rate rose 2.09% points to 4.06%.
Then overnight, the onshore Yuan gained even more following the latest CNY fixing at 6.6895 (some had expected that based on the USD move, the PBOC would have to finally fix the currency above the key 6.70 level) with USD/CNH seeing broad-based selling driven by banks turning to spot market to reduce CNH funding needs. The reason for that is that after last week’s dramatic spike in overnight funding rates, this morning Hong Kong’s overnight interbank yuan borrowing rate, or the yuan hibor, shot up to its highest level since February , soaring nearly threefold to 8.16% from only 2.84% on Tuesday.
Even more acute, the 1-week yuan hibor was set at 10.15%Â according to the Treasury Markets Association.
One reason for the latest surge in funding costs is that with Chinese and Hong Kong holidays on deck, liquidity is scarce. The Hong Kong market will be closed on Friday for the mid-autumn festival and the China markets will be closed on Thursday and Friday. China has traditionally intervened in currency markets just before holidays:according to the FT, last October using illiquidity just before its long National Day celebrations to intervene in Hong Kong and reduce an embarrassingly wide gap between the offshore and onshore rates.
