China Tries to Wane Yuan Speculation And Spooks Markets

China spooks U.S. futures.

Bullion.Directory precious metals analysis 12, January 2016
By Christopher Lemieux
Marco Strategist; Twitter @Lemieux_26

U.S. equity futures and the dollar are trying to pare back early losses as the People’s Bank of China (PBoC) tries to stifle yuan speculators by boosting the overnight rate substantially, which is causing stress in Chinese and Hong Kong money markets. 

The hike in overnight and one-week rates caused short-sellers to hit the exits, causing the offshore yuan (CNH) to reach parity with the onshore yuan (CNY). However, the results were somewhat short-lived as the spread has since widened.

According to Reuters, the PBoC set another daily fix for the yuan by what currency dealers said was “aggressive yuan buying.” The move by the central bank caused an extreme dry spell in liquidity that pushed the overnight borrowing rate in Hong Kong, known as HIBOR, to hit a record 66.8 percent.

The one-week implied CNH rate jumped to 36.9 percent.

This move has even been dubbed the “nuclear weapon,” as moves like this are targeted for weeding out large speculators.

The PBoC has said that the rapid move in the yuan is “ridiculous,” but its intervention may backfire. The massive increase in financial stress caused by such moves could trigger a larger crisis. But, in the near term, it has greatly punished non-speculators that may need to borrow yuan for short-periods.

Last year, Russia faced a similar situation when speculators piled in and forced the USDRUB rate to 81 rubles per dollar, causing sudden bouts of inflation and financial strain. This was largely due to the drop in oil prices and the economic sanctions that were placed following the annexation of Crimea.

In response, the Russian central bank increased their one-week repo rate to 17 percent, a jump of 6.5 percent. As the ruble began to stabilize, the move was regarded as a success in defending the ruble. Unfortunately, it did not help the already deteriorating economy, and the ruble stands at 76 rubles per dollar.

China should focus on stabilizing its economic decline, first.

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