"Incredibly Aggressive" China Crushes Yuan Bears: CNH Surges Most On Record As Deposit Rate Hits 80%

Tyler Durden's picture

Last night we were amazed to report that with China starting its trading day, the overnight offshore yuan (CNH) deposit rate had exploded 31.5% points higher to 45%, in a move which while freezing interbank liquidity and unleashing havoc to short-term bank funding needs, had the more direct intention of crushing Yuan shorts, by making short holding costs soar through the roof and forcing a short squeeze.

As it turns out, that was just the beginning, because before the night was over, the overnight offshore Yuan deposit would hit a record 80%, while the USDCNH would tumble as low as 6.78, resulting in the biggest 2-day move higher in the offshore Yuan on record, or as Bloomberg reports, "the yuan gained 1% at 2:53 p.m. in Hong Kong, taking its two-day move to 2.3%, the most in data going back to 2010."

But the one chart everyone is talking about today is that of the overnight CNH deposit rate, which after touching 45% at the start of China trading day, surged to a record 80% just a few hours later...

... while the spread between the offshore and onshore exchange rates widened to the on record. Ultimately, the offshore yuan erased the day’s losses in a sudden move around 1:05 p.m as the premium over the onshore rate widened to 1.2%.

This follows after Chinese policymakers explicitly urged SOE banks to sell foreign currencies, and further "punish" short sellers.

The overnight deposit rate in the city surged to a record 80 percent, while the spread between the offshore and onshore exchange rates widened to the most since 2010. Bloomberg News earlier reported Chinese policy makers were encouraging state-owned enterprises to sell foreign currency.

As SocGen summarized the unprecedented indirect intervention by the PBOC, "investors are cutting bullish positions in the dollar after the report underscored China’s determination to support the yuan."

The overnight fireworks come, of course, after policymakers in Beijing recently unveiled a slew of new capital control measures to tighten control of the currency market, including placing higher scrutiny on citizens’ conversion quotas and stricter requirements for banks reporting cross-border transactions.

“Given the recent capital controls, the channels for domestic institutions and retails to bring out onshore cash to the offshore market have also been tightened,” said Becky Liu, a rates strategist in Hong Kong at Standard Chartered Plc. “There is a lack of supply of yuan liquidity.”

Meanwhile, the liquidity drain which we have followed every day this week continued, and is set to accelerate further as tomorrow forward points surged to a record. In other signs of yuan scarcity, HSBC Holdings raised its three-month yuan deposit rate to 2.85 percent from 1.8 percent, according to the Oriental Daily, while the cost of borrowing yuan overnight in Hong Kong surged by 21.4 percentage points, Bloomberg reported. That’s the most since January 2016, when the authorities choked yuan supply to burn speculators betting on declines.

Paradoxically, the measures have only heightened skepticism among currency watchers: “We know the capital controls aren’t working because that’s why they’re having to raise the overnight deposit rate so aggressively by the PBOC, which is still basically the guiding hand in the offshore yuan market,” said Michael Every, head of financial markets research at Rabobank Group in Hong Kong. “It’s an incredibly aggressive tactic.”

High short-term funding costs, which will continue to trend higher, could dissuade significant short yuan positions from being added in the near term, Societe Generale strategists led by Jason Daw wrote in a note Thursday.

The good news is that, if only briefly, the rebounding Yuan would alleviate capital outflow pressure on Chinese authorities, who are battling to curtail capital flowing offshore after an annual $50,000 quota for citizens to buy foreign exchange reset on Jan. 1 and the imminent inauguration of U.S. President-elect Donald Trump lifts the dollar. Investors have been watching for the yuan to break the psychologically key level of 7 against the greenback for the first time since 2008.

However, make no mistake, this is capital control war to prevent the Yuan from being dragged lower as the dollar surges, a war which overnight spilled over into other Asian currencies, most of which jumped in sympathy with the Yuan.

“The weaker dollar overnight should help push the yuan further away from the 7 level for now, aiding the Chinese authorities’ recent efforts to stabilize the currency,” said Christy Tan, head of markets strategy in Hong Kong at National Australia Bank Ltd. “We expect the authorities to maintain an elevated currency management mode in the run-up to Donald Trump’s inauguration on Jan. 20, and until after the Lunar New Year break from Jan. 27 to Feb. 2.”

Ultimately,  the offshore yuan’s strength will be short-lived because the Hong Kong Monetary Authority may add supply of the currency to lower funding costs, and the dollar could rally, said Andy Ji, a Singapore-based currency strategist at Commonwealth Bank of Australia... but not before enough shorts have been carted out feet first. Even so, the long-term direction of the Yuan is clear: the onshore exchange rate will decline 3.6 percent to 7.15 per dollar by the end of this year, according to the median estimate in a Bloomberg survey.

"Fundamental reasons that are driving depreciation, such as capital outflows and concerns on Trump’s China policies, haven’t changed," said Qi Gao, a Singapore-based foreign-exchange strategist at Scotiabank, quoted by Bloomberg.

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Scrubbing Bubblez's picture
Scrubbing Bubblez (not verified) Jan 5, 2017 6:23 AM

Jump, you commie bastards!

NoDebt's picture

What happened to last night's top-kick article about the white "Trump supporter" who was kidnapped and beaten up by 4 black kids?  I wanted to link that for my morning email to a few friends.

Please tell me that didn't end up being a hoax.

Acceptable answers would include:

1.  The Russians hacked it.

2.  The "fake news" police got a court order and demanded Tyler take it down.

3.  Nobody has any idea what the hell you're talking about NoDebt.  There was never any such article.


Ghordius's picture

NoDebt, you can exclude 3, I saw it, too

NoDebt's picture

Thanks, Zen.  Wondering- why can it be found on a search but not just by paging back through the pile of articles?  If I can't find it on the first 3 pages of articles it's "gone" to me, for all intents and purposes.


Zen Xenu's picture

I didn't use a seach, just went back 4 or 5 pages to yesterday's news.

NoDebt's picture

Why was it buried so far back when it was the top "blue bar" acticle mere hours ago?  Sorry.  I know I'm asking the wrong person here.  Just thinking out loud, really.


Zen Xenu's picture

ZH articles tend to stay relatively in the time sequence order which they were posted.  Newest articles on top, and older articles continuously pushed further back. "Highlighted" articles get temporarily "stickied" at the top of the site.

Once older (stale) "highlighted" articles get replaced with new "highlighted" articles, the old article gets "unstickied" and reverts back to its place in the time sequence of articles. 

I'm not an admin here, that's just the way that many time-sensitive forums work. ZH is basically a blog on steroids.

BandGap's picture

Odd, isn't it? Almost like the powers of the air want this to be suppressed because of the imminent backlash.

These people who are pulling off this violent bullshit are putting people in danger - from their side of the ledger. America has had enough.

Happy reading!

Last of the Middle Class's picture

They're gonna have to make a shit load of cheap US product knock offs to cover that.

new game's picture

sell treasuries, janet waiting to qe it to balance stmnt; japan style support, buyer of LAST resort. desparation in fx land-LOL...

TheytookERjobs's picture

That's why you shouldn't use stop losses

dubaibubble's picture

these moves are all "window dressing" and saving "face" for the stiffs in Beijing

I see them making a one-off devaluation in the near term to support exports, less bravado



Catullus's picture

I guess a bank run will keep your currency from depreciating.


Lady Jessica's picture

Epic capital flight picking up pace.

Epic debt accumulation heading....whither?

Screws tightening on the consumption of Chinese junk....in Mr Trumps's mind at least.

The much vaunted era of the "Chinese consumer" still a pipe dream.

The FED ostensibly unleashing a tightening cycle in the midst of currency war.

Where will the chips fall?

Panic Mode's picture

"Bulls make moneybears make money, pegs get slaughtered"

illuminatus's picture

I love it when the big boys beat up on each other.

wholy1's picture

Yo, Ackman, Bass, Tepper and ilk - squirm you predatory financial bastards contributing NOTHING to REAL productivity!

back to basics's picture

Another day, another central bank intervention. What a sham world markets, all of them, equities, bonds, fx, have become. 

gdpetti's picture

Yes, but, to date, very little global debt is denominated in Yuan, so it's really a domestic game being played... and export driven countries always prefer to cheapen their fiat, so this gives them a perfect opportunity to do 2 birds with one shot, so to say.... as they are still holding all that worthless DC fiat.... what a great opportunity to get rid of more of it without anyone complaining... perrrrrrrfect, no?

Let it Go's picture

I continue to think the problems in China are much larger than most people realize. Recently China has been on a tear to add liquidity to its flagging financial system. What it is failing to do is reform. A combination of corruption, to much debt, and policies that misallocates capital will come back to haunt them.

Expect the debate to continue as to whether China has turned the corner, however, one thing is clear and that is money flowing out of the country continues to distort markets across the world. More on this subject in the article below.