BEIJING (BLOOMBERG) - The offshore yuan strengthened the most in two months amid speculation that China's central bank propped up the exchange rate after setting a weaker fixing that sent it into a tumble.
The currency swung from a 0.3 per cent gain to a 0.7 per cent loss and back in the space of about 30 minutes, spurring intervention speculation and creating confusion about what the central bank is trying to achieve. The yuan turmoil sent mainland shares into a spiral, forcing an early trading halt for the second day this week.
"China isn't communicating its policy intentions in a clear manner," said Sue Trinh, head of Asia foreign-exchange strategy at Royal Bank of Canada in Hong Kong. "It is sending confusing signals to the market. And it's disappointing that their communication policy is less than transparent."
The offshore yuan advanced 0.44 per cent to 6.6837 per US dollar as of 12:10 pm in Hong Kong, according to data compiled by Bloomberg, after reaching the weakest level since September 2010. The spot rate in Shanghai plunged 0.57 per cent to a five-year low of 6.5923. The People's Bank of China reduced its fixing, which restricts onshore moves to a maximum 2 per cent on either side, by 0.51 percent to 6.5646, the lowest since March 2011.
The CSI 300 Index of equities plunged 7.2 per cent before bourses were halted by circuit breakers in the first half hour of trading.
"We saw aggressive intervention in the offshore yuan market," said Zhou Hao, an economist at Commerzbank AG in Singapore. "We don't really understand the rationale behind the market movements in the past few days. Obviously, these movements have reminded us of the market rout last year."
While China's defense of the yuan stabilized the currency for almost four months following an Aug 11 devaluation, the intervention led to the first-ever annual decline in the nation's foreign-exchange reserves. Official support has been more sporadic since the start of December as the weakest economic expansion in a quarter century and rising US interest rates spurred capital outflows.
"The PBOC is intentionally guiding the yuan weaker by cutting the fixings, as it wants to allow the currency to reflect the weak fundamentals and help the economy," said Kenix Lai, a foreign-exchange analyst at Bank of East Asia Ltd. in Hong Kong. "The PBOC's tolerance of yuan weakness and a widening gap between the onshore and offshore rates has significantly increased. The onshore yuan will hit 6.65 a dollar much faster than we expected."
The PBOC has weakened its daily fixing by 2.57 per cent since winning entry into the International Monetary Fund's reserves basket on Nov. 30. The central bank stepped into the currency market on Tuesday to prevent excessive volatility in the exchange rate, according to a person with direct knowledge of the matter. The intervention wasn't meant to guide the yuan higher or lower, the person said.
The yuan's one-month implied volatility, a measure of expected swings used to price options, increased 53 basis points to a four-month high of 7.42 per cent in Shanghai, according to data compiled by Bloomberg.
The yuan's drop on Thursday caused a loss of confidence in policy, which spilled over into equities, Aidan Yao, a senior economist at AXA Investment Managers, said in an interview.
"The pattern of their fixing has changed to being weaker than or in line with the previous close, which signals a greater willingness to let the yuan depreciate," said Mirza Baig, head of foreign-exchange and interest-rate strategy at BNP Paribas SA in Singapore.
"The reality is that because there's a lack of transparency in the PBOC's intentions, the market reads the reversal in the fixing's pattern as showing willingness to let the yuan depreciate."