Yuan heads for best week since January in snub to Moody's cut

Beijing - The onshore yuan headed for its strongest weekly gain against the dollar in four months amid speculation that China’s central bank has been intervening to support its currency.

The yuan gained 0.3% to 6.8621 per dollar as of 6:01 in Shanghai, taking its weekly advance to 0.36%. The gap between the reference rate and the daily close had widened earlier in the week as traders pushed back against central bank efforts to guide the currency stronger against the greenback.

China is considering changing the way it calculates the daily fixing, adding a "counter-cyclical factor" that may blunt the impact of big market swing.

The currency and the nation’s stocks have rallied since Moody’s Investors Service downgraded the nation’s debt on Wednesday for the first time in three decades, with state-backed funds also speculated to be buying up shares.

The Shanghai Composite Index has climbed 1.6% in the three-day period.

"With suspected intervention and stronger fixings, the PBOC is making its attitude clear: it doesn’t want the yuan to depreciate because of the Moody’s downgrade," said Kenix Lai, a Hong Kong-based foreign-exchange analyst at Bank of East Asia.

"The central bank will continue to take this stance in the near term, pushing the yuan to as high as 6.8250 in the short run. But in the longer term, it wouldn’t want the currency to go too strong as that hurts exports."

On Thursday, the yuan jumped 0.3% after at least two Chinese banks sold dollars in the onshore market, according to three traders who declined to be identified as they aren’t authorized to speak with the media.

In recent weeks, the central bank has consistently set stronger reference rates than analysts predicted.

Under the new yuan fixing formula communicated to banks by China’s monetary authority this week, institutions that provide quotes for the fixing will take into account not only the previous day’s official closing price at 4:30 local time and the changes in baskets of currencies, but also the new counter-cyclical adjustment factor, said people familiar with the matter told Bloomberg.

"The PBOC has been fixing with a major dose of discretion," said Sue Trinh, head of Asia foreign-exchange strategy at RBC Capital Markets in Hong Kong.

"We can consider this 'counter-cyclical adjustment factor' as using that discretion."

In Hong Kong, the offshore yuan strengthened 0.2% to 6.8352 a dollar as money-market rates signalled liquidity was tight. The rate to borrow the offshore currency overnight in the interbank market jumped 3.59 percentage points to 7.7565%, the highest since January.

"Some major Chinese banks have been aggressively draining offshore yuan liquidity from the market in overnight to one-month tenor," said Ryan Lam, head of research at Shanghai Commercial Bank.

"It’s likely intervention from China to support the yuan spot rate."