Chinese yuan is skyrocketing for a second consecutive day after registering the biggest single-day rise since last January against the dollar as the People’s Bank of China (PBoC) drains liquidity from the interbank space amid a broad-based weaker dollar. Yesterday, the yuan rose by almost 0.9 percent, the highest since last January, when it rose by 1.46 percent in a single day. On January 3rd, the onshore yuan was trading 6.96 per dollar but today it is up to 6.88 per dollar. The offshore yuan is up for the third consecutive day. On January 2nd, it was trading at 6.97 per dollar and currently it is at 6.82 per dollar. Today it is up almost 0.9 percent against the dollar. In intraday trading, it was up as high as 6.78 per dollar.

One of the major factors that pushed the yuan higher has been the higher interest rates on yuan in the Hong Kong market. The interbank borrowing rate for offshore yuan jumped to 38.335 percent, the highest level since last January when it hit 66.815 percent. The rate was at 16.95 percent yesterday. While all the analysts including us would associate the strength in the yuan with the rise in HIBOR due to PBoC’s draining of liquidity from the offshore market, what puzzles us is the level of interest rate required to push the yuan higher.

We have already predicted that the rates would be rising in China and this shows us why.