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January 7, 2017

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Offshore yuan set for biggest weekly increase

CHINA’S offshore yuan pared some of its sharp gains racked up this week, but is still on course for its biggest weekly rise.

Both onshore and offshore yuan have been rallying, driven predominantly by a blow-up in yuan borrowing costs offshore and tighter liquidity.

The spread between the two spot rates widened to its highest since 2010.

Chinese authorities are keen to deter speculation in the currency and traders think policymakers have sought to prevent it from weakening to the 7-per-dollar level.

Traders said the market had long held a strong “one-way” hope of depreciation in the yuan and the rally in the currency over the week was the authorities’ bid to alter such views.

China’s currency has been under pressure from uncertainty over the health of the world’s second largest economy, massive capital outflows and the sharp rise in the dollar following Donald Trump’s election victory and anticipation of US interest rate hikes.

The yuan is only allowed to rise or fall two percent on either side of the daily fix, to prevent volatility of the currency.

China said last week it would almost double the number of foreign currencies it uses to determine the official value of the yuan, thereby diluting the role of the dollar as authorities seek to arrest the yuan’s fall and project an image of stability in the unit. But pressure will remain.

“I don’t think the volatility in the yuan so far this week will reverse the trend of depreciation. But the yuan is unlikely to have another rapid fall ahead of the Lunar New Year,” said a Shanghai-based trader at a foreign bank, referring to the week-long holiday starting on January 28.

The People’s Bank of China 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, 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.

The yuan traded 0.6 percent weaker against the dollar late yesterday but is still around 0.3 percent firmer than last week’s close and is on track to log its best week in more than a month.


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