Asian currencies rise as offshore yuan surges vs US$

SINGAPORE — Asian currencies rose yesterday, led by the offshore yuan which jumped to its strongest level in nearly two months as a spike in funding costs triggered a frenzy of short covering in the Chinese currency.

The offshore yuan climbed as much as 1.2 per cent to 6.7850 per US dollar, its strongest level since Nov 9, before giving up some gains to trade at 6.8338 late in Asia, still up 0.5 per cent on the day. The onshore yuan was trading 0.6 per cent higher at 6.8920 after hitting a one-month high at 6.8720.

Market participants said the surge in the yuan spurred some scaling back of long US dollar positions and short-covering in Asian currencies.

“The move helped to trigger some profit-taking in the US dollar by weakening the outflows story from China,” said Mr Philip Wee, senior currency economist for DBS Bank.

US dollar positions were also liquidated ahead of the US December jobs data due tomorrow, traders said. In late Asian trade, the Singapore dollar was up 0.4 per cent at S$1.4345 against the greenback, while the Malaysian ringgit rose 0.3 per cent to 4.4858 against the US currency.

Borrowing costs surged as China worked to stem capital flows and stabilise the yuan ahead of Mr Donald Trump’s inauguration as US president on Jan 20 and the Chinese New Year on Jan 28. It was not clear if Chinese authorities had engineered the spike in yuan interest rates in Hong Kong yesterday but they had used such a tactic several times last year to support offshore yuan exchange levels and by extension relieving some of the pressure on the yuan onshore.

The cost of borrowing yuan, as measured by the CNH Hong Kong Interbank Offered Rate benchmark, surged to 38.3350 per cent for overnight contracts, the highest since January 2016, from 16.9477 per cent on Wednesday.

With signs of short-term liquidity stress, the implied overnight deposit rate for the offshore yuan stood at 90.393 per cent, after soaring as high as 101.694 per cent. The rate closed at 10.5870 per cent a day earlier.

Despite yesterday’s gains, the ringgit, one of Asia’s worst-performing currencies over the past year, has further room to fall this year, according to BMI Research, which said the Malaysian currency is going to be affected by its exposure to China.

“The Chinese economy remains mired in a medium-term slowdown as the structural weaknesses, such as overcapacity in the industrial sector and dominance of inefficient state-owned enterprises, persist. Given that China is Malaysia’s largest export partner, we believe that Malaysia’s export-driven economy remains exposed and is likely to be negatively impacted,” BMI said in its research note.

BMI lowered its forecast for the ringgit, expecting it to average 4.50 per US dollar this year and 4.40 in 2018, from 4.00 and 3.88 previously. The currency, which fell 4.3 per cent against the greenback last year and 18.5 per cent in 2015, has not posted an annual gain since 2012.

Meanwhile, Mr Vishnu Varathan, Head of Economics & Strategy at Mizuho Bank, said: “We do expect risks of a further ringgit slide over the next three to six months to 4.50-4.70 per US dollar, assuming that the trend of rising US bond yields and consequently stronger US dollar remains intact. However, later this year it is likely to recover to levels around 4.20.”

Malaysia’s Deputy Finance Minister Othman Aziz talked up the ringgit yesterday, saying it will rebound to 4.1 against the US dollar in the third quarter of the year, in line with the forecast of some bankers, based on improving commodity prices such as rubber and palm oil, as well as steady economic fundamentals.