Offshore yuan rose to a three-month high while onshore yuan rose sharply to a two-month high after the Lunar New Year holiday, with the Peoples Bank of China setting the mid-price

higher after the weeklong break.

The Hong Kong dollar was stable after the monetary authority said speculators would not find it easy to undermine the currency’s peg to the US dollar.

Hong Kong Monetary Authority chief executive Norman Chan Tak-lam reiterated on Monday afternoon that it would not be easy for currency speculators to short sell the Hong Kong dollar. The Hong Kong dollar was trading at 7.7840 to the US dollar at 4.30pm, up by 0.006 of per cent after a weekly gain of 0.93 per cent last week.

Chan said in an Legislative Council meeting that since Hong Kong banking liquidity was now over HK$300 billion and given the sheer size of the HK$3.4 trillion Exchange Fund, short sellers would need to spend more than HK$100 billion to short sell the Hong Kong dollar now, rather than the several billion they used in 1997.

“There is only very little room for the speculators to benefit from the local stock market and the currency,” he said. “The HKMA is determined to keep the peg stay on. There may be some speculators trying to spread the negative sentiment in the market to allow them to make a profit. The public should not be over worried.”

The onshore yuan rose to two-month high on Monday after the PBOC set the mid-price higher so the currency could catch up with the rise of the offshore yuan, which went up last week when trading in the onshore yuan was shut due to the Lunar New Year holiday.

The onshore yuan climbed to 6.4870 to the US dollar early on Monday afternoon before softening to 4.4936 at 4.30pm, stronger by 1.18 per cent from the level on February 5 before the Lunar New Year break, when it ended at 6.57190. It is the strongest level for the currency since December 25.

So far this year the onshore yuan is down just 0.02 per cent against the US dollar, having erased all but a small fraction of last month’s losses.

The PBOC set the mid-price fix for the onshore yuan at 6.5118 to the US dollar, stronger by 196 basis points or 0.3 per cent from February 5.

Traders are allowed to trade 2 per cent above or below the midpoint set daily by the PBOC but the central bank suspended the fixing last week for the Lunar New Year holiday.

Heng Koon How, senior currency strategist at Credit Suisse, said both the onshore and offshore yuan were uncharacteristically strong on Monday but that would not last for long.

“The PBOC fixed onshore yuan stronger against the US dollar, this is mainly because the US dollar was broadly weaker over the past week when China was away,” Heng said. “In addition, PBOC governor Zhou Xiaochuan was also quoted over the weekend as saying that China is not pursuing any large devaluation of the onshore yuan. That eased market concerns of any large devaluation risks.”

However, Heng said that since Zhou reiterated the PBOC’s intention to keep the onshore yuan stable against a basket of currencies, that meant there was still room for onshore yuan to weaken against the US dollar.

“Effectively, both onshore yuan and offshore yuan have recovered all of their losses across January,” he said. “This is unlikely to be sustainable as the broad fundamentals are still negative. We would advise investors to take this opportunity to hedge their China risks.”

The offshore yuan traded at a three-month high of 6.4855 to the US dollar early on Monday afternoon before softening to 6.4791 at 4.30pm, stronger by 0.18 per cent than last Friday. The currency has now risen 1.08 per cent against the US dollar this year, after depreciating 1.72 per cent in the first week of the year.

The offshore yuan rose 0.93 per cent last week due to the weak US dollar. Some traders also put the stronger tone down to PBOC intervention in the market.

The onshore yuan was trading at a similar level to the offshore yuan on Monday. On January 7, the spread stood at a record 1,400 basis points.

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