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 But those betting on a further depreciation in the yuan are likely
to have only limited room to push the offshore rate down relative to
the onshore rate without drawing the ire of the Chinese central bank
and the risk of further state intervention, market sources said.
"The central bank will not stand aside if depreciation expectation
is formed again and more intervention may happen," said a Hong
Kong-based currency trader, who declined to be identified.
The offshore yuan <CNH=D3> shot up by more than 1 percent on
Thursday on suspected intervention that was seen by traders as a
gesture by authorities to shake out speculators betting against the
yuan.
Authorities have spent the country's foreign exchange reserves
heavily to hold the yuan steady onshore since a surprise devaluation
in August prompted fears the Chinese economy was in worse shape than
previously thought and that the yuan therefore could fall further.
Thursday's spike narrowed the offshore yuan's discount against the
onshore rate to 0.38 percent from 1.56 percent on Wednesday and
forced traders with short positions to cover. Traders suspect the
sudden move was prompted by buying by state banks at the behest of
the central bank.
"The Chinese central bank's purpose was to narrow the gap between
the offshore and onshore rates, but I don't see any fundamental that
supports yuan appreciation against the dollar going forward," said
Penny Chen, a fixed-income fund manager at Manulife Asset Management
in Taiwan.
Since the Aug 11 devaluation, several investment banks, including
Goldman Sachs, Morgan Stanley and UBS, have revised down their
forecasts for the yuan's performance this year.
The Chinese currency will remain under pressure as long as U.S.
interest rates are set to rise, analysts said. U.S. market rates
have already risen in anticipation the Federal Reserve will raise
its policy rate by the end of this year for the first time since
2006.
In contrast, the Chinese central bank has cut lending rates five
times since last November and analysts expect further easing of
monetary policy to support China's economy.
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The interest rate differential will be reflected more in the
offshore market, where China's central bank has less influence,
analysts said. The offshore yuan was quoted at 6.4150 per dollar
late on Friday in Asia, compared with an onshore rate of 6.3740 - a
gap of 410 pips. It was 200 pips earlier in the day, but traders
said the gap widened after London offshore markets kicked into
action.
Some traders believe the central bank will not allow the gap to
widen to 500 pips for fear that would strengthen expectations of
further yuan depreciation.
Still, the central bank has less influence in the offshore market,
which is more driven by market forces, and so leaves more room for
the yuan to fall, said Liao Qun, China chief economist at Citic Bank
International in Hong Kong. "The gap between CNH (offshore) and CNY
(onshore) will be widened to 500-600 pips again in the coming
months," Liao said.
Liao expected the onshore and offshore rates to fall to 6.45 and to
more than 6.5 per dollar, respectively, by the end of the year if
the Fed increases its benchmark rates.
(Additional reporting by Saikat Chatterjee; Editing by Neil Fullick)
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