Renminbi Series: HIBOR crashes, so does yuan

The interbank rate to borrow yuan for overnight loans crushed from a near record high of 61.3 percent on Friday to 14.05 percent on Monday. The rate is still elevated compared to the historical average, which is around 1-2 percent. The Friday’s rate of 61 percent is the second highest for the yuan, just behind last year January’s record rise to 66.815 percent.

While the 2016 January’s spike in the yuan-HIBOR was attributed to People’s Bank of China’s (PBoC) liquidity draining via state-owned banks, the causes for this year’s spike have been less clear. While is it largely expected that PBoC played its part, what concerned us at FxWirePro is the level of the interest rate on the yuan that was required to strengthen the currency.

We suspect that the high levels of interest rates that we are witnessing in the Hog Kong market, would start sip into the mainland and there are strong possibilities that the rates would rise all across the curve. The yuan is currently trading at 6.935 per dollar in the onshore market and 6.876 per dollar in the offshore market. The offshore yuan is down more than 1.2 percent the past two days after a record two-day gains last week.