SHANGHAI/LONDON: China's yuan closed down against the dollar for the fifth session on Thursday while the offshore market accelerated away from the onshore rate, stirring speculation over whether the Chinese central bank will intervene to cap any further losses.
The onshore yuan closed at 6.4378 per dollar, its lowest closing level in more than four years. The offshore yuan fell more sharply to around 6.52 per dollar before recovering to trade at 6.5065.
The CNH has lost 1.6 percent in the past week and ended the Asian trading day around its weakest against the dollar since 2011.
Traders in London said Chinese sellers of dollars had largely disappeared from the offshore market since the IMF's rubberstamping on Nov. 30 of the yuan's place in its basket of reserve currencies.
But they also said that speculative investors who trade the difference between the onshore and offshore rates had taken some profit in the morning in London, a reflection of expectations of official intervention.
"Since the IMF decision there's been a good amount of dollar buying, mainly from the internationals, without the selling by domestic names and that's led the yuan lower," said a dealer with one Asian bank in London.
"The spread has been a key thing that people were looking at in terms of anticipating domestic selling. When dollar CNH traded 1000 points above the onshore rate this morning a lot of people chose to take profit."
Zhou Hao, an economist at Commerzbank in Singapore, said offshore traders, who are more inclined to trade derivatives, were rapidly unloading yuan positions in reaction to the central bank's behaviour in the onshore market, specifically its decision to steadily lower its daily midpoint guidance rate.
Prior to the market open on Thursday, the People's Bank of China (PBOC) set the midpoint rate at 6.4236 per dollar, its lowest level in more than four years.
NO LONGER GUIDING?
The PBOC has also set the fix more closely to the previous day's close, suggesting it is no longer trying to guide the onshore market but rather follow it.
"The central bank has let the fix (the midpoint) go. So that delivered a very clear signal to the offshore market that the renminbi will depreciate," Zhou said, adding that heavy use of derivatives offshore tends to produce more volatility there.
"It's very clear that (officials) want to see monetary policy easing, which implies a weak currency," he said. "But the offshore market now appears to be a bit more out of control. The expectation of further renminbi depreciation is far more intense than the PBOC expected."
Prior to the admission of the yuan into the International Monetary Fund's currency basket in November, the PBOC had held the onshore and offshore markets closely together. Some analysts saw this as a response to criticism that the wide margin between the two represented a major risk for foreign investors.
However, HSBC economists argued in a research note that the PBOC, by granting SDR member central banks direct access to its onshore market, had relieved the IMF's concerns. More depreciation of the yuan is justified because it is occurring as other currencies also fall against the dollar, HSBC said.
"The RMB is becoming over-valued again in trade-weighted terms," they wrote, as other neighboring economy currencies also slide against a rampant dollar.
A trader at one bank in Shanghai said the domestic market anticipated more slides to come.
"Still, the central bank can step in and curb the currency's loss at any time it wants," the trader said.
Another London-based trader said there were concerns in the market the PBOC might move against a further widening of the band.
"It has been very volatile this morning and you can see for yourself that there has been a limit to how far the market can push CNH," he said. "I wouldn't like to speculate on what the PBOC will do from here."
A Reuters survey this week of fund managers, currency traders and analysts found that bearish bets on the yuan hit the largest level since April 2010.
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