China's yuan jumps to 2-month high in ‘show of strength’ after downgrade

SHANGHAI: China's yuan leapt to a near two-month high against the US dollar on Thursday, supported by major state-owned banks in what some traders said was a show of strength a day after Moody's downgraded the country's credit rating.

"Major state-owned banks were selling dollars in the market," said a trader at a Chinese bank in Shanghai, adding that it "clearly showed" the authorities' interest in keeping the currency strong.

Banks poured dollars into the market after the yuan remained stubbornly flat in morning trade despite US dollar weakness overseas, traders said.

In the spot market, the yuan opened at 6.8860 per dollar and suddenly strengthened nearly 200 pips to a high of 6.8690 per dollar at around 0250 GMT, the strongest intraday level since March 27.

It was changing hands at 6.8737 per dollar at midday, 158 pips stronger than the previous late session close but 0.06 percent weaker than the midpoint.

The yuan appeared to be on track to firm by around 0.2 percent, which would mark its biggest one-day gain against the dollar since Feb. 16.

Many believe sales of dollars by state-owned banks since late last year have been part of official efforts to prop up the Chinese currency, which lost 6.5 percent of its value against the dollar last year and was widely expected to continue to slip this year.

The People's Bank of China set the midpoint rate at 6.8695 per dollar on Thursday, firmer than the previous fix of 6.8758 and stronger than some market watchers had expected.

Five traders said they saw state banks offering dollars in the market on Thursday.

One who declined to be identified by name said he also suspected the dollar selling and sharp upward pressure on the yuan was being directed by the government in a show of strength after the downgrade.

The moves by state banks pushed the daily trading volume to $17.46 billion as of midday, compared with $23.79 billion yuan for the full previous session.

The yuan had dipped on Wednesday on corporate dollar demand, with the market appearing to largely shrug off Moody's first downgrade of China's sovereign credit rating for the first time since 1989.

Wednesday's PBOC fixing also had been somewhat stronger than expected, reflecting a recent pattern of firmer guidance.

China's Finance Ministry said the downgrade overestimated the risks to the economy and was based on "inappropriate methodology".

Separately, China's commerce ministry said in a report published on Thursday that while the central bank had intervened periodically in the foreign exchange market to "prevent overshooting and short-term volatility", its operations did not amount to exchange rate manipulation.

Offshore, the yuan also surged to its strongest intraday level since March 28. It was trading 0.1 percent firmer than the onshore spot at 6.8654 per dollar.

Hong Kong's overnight yuan borrowing rate jumped to 4.16500 percent on Thursday, the highest level in three weeks.

CNH Hibor, The CNH Hong Kong Interbank Offered Rate benchmark, set by the city's Treasury Markets Association (TMA), showed rates up across maturities.

The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 93.31, weaker than the previous day's 93.44.

The global dollar index fell to 96.924 from the previous close of 97.238.

Offshore one-year non-deliverable forwards contracts (NDFs), considered the best available proxy for forward-looking market expectations of the yuan's value, traded at 7.061, 2.71 percent weaker than the midpoint.

One-year NDFs are settled against the midpoint, not the spot rate.