January 5, 2016 / 9:19 AM / 4 years ago

Spread between onshore, offshore yuan widest since September 2011

HONG KONG (Reuters) - The spread between onshore and offshore yuan hit its widest level in more than four years on Tuesday after the central bank was suspected to have intervened in the onshore market to support the currency.

A clerk counts Chinese yuan and U.S. dollar banknotes at a branch of Bank of China in Taiyuan, Shanxi province, China, January 4, 2016. REUTERS/Jon Woo

The People's Bank of China set the midpoint rate CNY=SAEC at 6.5169 per dollar prior to the market open, weaker than the previous fix of 6.5032 and the weakest level since April 2011.

In the onshore spot market, the yuan CNY=CFXS strengthened immediately after the opening. It was trading at 6.52 per dollar at 0830 GMT (3.30 a.m. ET) in Shanghai.

The spot rate is allowed to trade with a range 2 percent above or below the official fixing on any given day.

“It’s quite obvious that the central bank has intervened in the market via big Chinese banks in the morning and trading was very active,” said a trader at a Chinese bank in Shanghai.

Despite the interventions, the trader said his strategy was to continue shorting the yuan given China’s weak economic fundamentals.

The trader expected the Chinese currency to fall to 6.6 per dollar by the end of the year.

China struggled to shore up shaky sentiment on Tuesday a day after its stock indexes and yuan currency tumbled, rattling markets worldwide, but analysts warned investors to buckle up for more wild price swings in the months ahead.

“State-owned banks were offering dollar liquidity around 6.52 per dollar,” said a Shanghai trader at a major European bank. “They were apparently trading on behalf of the PBOC to help control the pace of yuan depreciation.”

In the offshore market, where the central bank usually takes a hands-off attitude, the yuan hit 6.6488 in late afternoon trade, the lowest in more than four years. It was 2 percent weaker than the onshore yuan midpoint.

The spread between onshore and offshore yuan widened to more than 1,200 pips, the highest level since September 2011.

Offshore one-year non-deliverable forwards contracts (NDFs)CNY1YNDFOR=, considered the best available proxy for forward-looking market expectations of the yuan’s value, traded at 6.8703, or 5.14 percent weaker than the midpoint.

One-year NDFs are settled against the midpoint, not the spot rate, and now that the trading band has been widened to 2 percent in either direction, corporates are much warier of using the NDF to hedge given the basis risk inherent in them.

As a result the market has lost liquidity in recent years and has frequently proven an unreliable measure of market sentiment.

The yuan market at a glance:

ONSHORE:

Item Current Previous Change

PBOC midpoint CNY=SAEC 6.5169 6.5032 -0.21%

Spot yuan CNY=CFXS 6.5248 6.5338 0.14%

Divergence from midpoint* 0.12%

Spot change ytd -4.92%

Spot change since 2005 revaluation 26.85%

*Divergence of the dollar/yuan exchange rate. Negative number indicates that spot yuan is trading stronger than the midpoint. The People’s Bank of China (PBOC) allows the exchange rate to rise or fall 2 percent from official midpoint rate it sets each morning.

OFFSHORE CNH MARKET

Instrument Current Difference from onshore

Offshore spot yuan CNH= * 6.648 -1.85%

Offshore non-deliverable 6.8703 -5.14%

forwards CNY1YNDFOR= **

*Premium for offshore spot over onshore CNY=CFXS

**Figure reflects difference from PBOC's official midpoint, since non-deliverable forwards are settled against the midpoint. CNY=SAEC.

Reporting by Michelle Chen and Lu Jianxin; Additional reporting by Shanghai Newroom; Editing by Kim Coghill

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