Hong Kong overnight yuan rates go negative as bears exit short positions, RRR bites

The overnight offered rate for offshore yuan (CNH HIBOR) plunged to -3.725 percent on Thursday, the first time it has quoted in negative territory, with some analysts saying the slide showed investors short on offshore yuan were quitting their positions in a hurry. If true, it would mark a victory for the People's Bank of China (PBOC) in its war against prominent short sellers who made big bets that Beijing would fail to put a floor under a falling offshore yuan.
Overnight implied deposit rates for offshore yuan - another indicator showing the state of demand in the market - touched as low as -27 percent at one point, the sharpest fall on record, Reuters data showed.
"It's the unwinding of positions built by those who were bearish on China and bullish on dollar/CNH that has caused today's collapse," said Patrick Bennett, strategist with CIBC, arguing that short sellers were dumping borrowed offshore yuan that they had been using for short trades back into the market.
"A lot of positions had been built in the 6 and 12 months, and they are now getting squeezed out. In order to be long dollar/CNH, you have to borrow CNH and rates were higher - those positions are being unwound and rates are collapsing at the front end."
Other analysts pointed to different factors at work, including the implementation of a reserve requirement ratio for Chinese banks holding offshore yuan which would be measured today.
"Today we have to calculate the amount of CNH reserves for the reserve requirement ratio, but everyone was afraid the money would be locked up for three months," said a domestic CNH trader in China.
He said that instead many banks dumped CNH back into the market for 24-hour period, allowing them to minimise the amount of CNH they would need to hold throughout the next quarter.
The PBOC is likely to be satisfied either way, as the RRR also forms part of a policy adjustment by Beijing to discourage speculation against the yuan , which many bet could only fall further as the PBOC moved to cut domestic interest rates, seen as bearish for the currency as it would spur capital flight.
CNH HIBOR represents interest rates contributed by banks each day as a reference for traders.
The same rate had spiked in January as high as 67 percent, which was also seen as a side effect of a move against short sellers in offshore markets, as the PBOC moved to buy yuan in offshore markets to halt a swift slide, draining the pool of offshore yuan. The onshore and offshore traded yuan have been steadily firming in recent days to trade around 6.5 per dollar, guided by a stronger fixing from China's central bank, and at the same time the offshore market has begun to move in harmony with the onshore market after months of consistently pricing on the downside.