SHANGHAI: China's yuan surged to a near seven-month high after a sharply stronger midpoint fixing on Thursday, strengthening views the central bank was setting the Chinese currency on a firmer path.
The People's Bank of China (PBOC) set the reference rate for the yuan up by 0.8 percent, the midpoint's second largest one-day appreciation since the currency was de-pegged from the dollar in 2005.
Tighter yuan liquidity offshore also pushed Hong Kong's overnight yuan borrowing rate to its highest in nearly five months on Thursday.
"The sudden surge in the yuan caused some panic among bank clients. Unlike the previous rallies in the yuan, this time, the one-way expectation of yuan depreciation has changed," a Shanghai-based trader at a Chinese bank said.
"Some clients were considering liquidating their dollar positions to stop loss. The next key level might be around 6.78 per dollar level," the trader said.
Before the market open, the PBOC fixed the official guidance at 6.809 per dollar, up from 6.8633 previously.
The spot market opened at 6.8011 per dollar and was changing hands at 6.7922 by midday, 248 pips stronger than the previous late session close and 0.25 percent firmer than the midpoint.
The onshore spot is now at its strongest since Nov. 10.
"The PBOC has let the yuan bulls loose in the China shop," said Stephen Innes, senior trader at OANDA in Australia. "Needless to say, the market is a tad shell-shocked this morning while searching for some policy clarity from the PBOC."
The spot rate is allowed to trade with a range 2 percent above or below the official fixing on any given day.
The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 95.25, firmer than the previous day's 94.64.
The global dollar index rose to 96.965 from the previous close of 96.922.
The offshore yuan was trading 0.91 percent stronger than the onshore spot at 6.731 per dollar.
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 6.9555, 2.11 percent weaker than the midpoint.
One-year NDFs are settled against the midpoint, not the spot rate.