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 The intervention caught the market wrong-footed and was seen by
traders as another bold gesture by Chinese authorities to shake out
speculators and dampen expectations for further depreciation in the
yuan following its devaluation in August.
The offshore yuan spot rate strengthened more than 1 percent to 6.39
per dollar from 6.4698 earlier in the day as the suspected
intervention prompted those betting on yuan depreciation to cover
their positions. Offshore traded volumes spiked as much as 10 times
their monthly average, Thomson Reuters data showed.
The jump took the offshore yuan rate to its strongest level since
early August when the central bank surprised markets by devaluing
the currency nearly 2 percent.
"The big picture is that policy makers are doing everything they can
do to dampen expectations that the yuan will depreciate much," said
Mark Williams, an economist at Capital Economics in London.
"There's been rumors before of state entities acting on behalf of
the central bank offshore. It shows that policymakers are unwilling
to relax control of key variables that now include the offshore
currency."
The PBOC did not respond to calls requesting comment.
As a result of the intervention, the long-standing spread between
the onshore and offshore rates narrowed sharply, while dollar
currency forwards dropped.
The wide gap had implied that offshore markets were pricing in
further depreciation in the currency, an expectation China has been
trying to suppress.
While the central bank can guide the currency onshore by setting a
daily reference rate, the offshore market is not bound by that
marker.
The cost of keeping the yuan firm against the dollar even as
neighboring currencies have depreciated has been expensive for
Beijing, leading to a record drop in the country's foreign exchange
reserves in August of close to $100 billion.
This was a major reason behind the devaluation in August, analysts
have said.
The offshore yuan discount to the onshore yuan spot market narrowed
to 0.47 percent after the suspected intervention, from 1.56 percent
on Wednesday.
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"In the very extreme moment of the buying, we saw a rare reverse
market quote in the Chinese currency which is an indicator that the
buyers wanted to push up the value of the yuan at any cost," said
the head of local currency trading at a U.S. bank in Hong Kong.
A "reverse market quote" refers to when the bid price is higher than
the offer price, which traders said pointed to intervention.
"There are some Chinese banks steadily buying large amounts of yuan,"
said a trader at an Asia commercial bank in Hong Kong.
"But even if it is intervention by the central bank, I don't think
it will change the expectation on the depreciation of yuan."
Onshore traders in the past have said the central bank often
instructs major state-owned banks to intervene onshore, buying or
selling yuan to control the market exchange rate. Traders said a
sharp depreciation in the yuan in early 2014 was engineered by the
central bank to shake out speculators.
Traders said they believe the central bank intervened strongly in
the onshore market in the run-up to the devaluation in August,
causing intraday price volatility to evaporate. But since the
devaluation, strong depreciation pressure has been in evidence in
forwards markets and the offshore spot market.
(Reporting by Michelle Chen and Pete Sweeney; Additional reporting
by Lu Jianxin, Saikat Chatterjee and Shanghai bureau)
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