Chinese Currency Bears Crucified After Yuan Overnight Deposit Rate Hits 65%

Less than a week after China revised its Yuan fixing mechanism (hours after China's downgrade by Moody's) to add a "counter cyclical factor" in what many suggested was a new mechanism for the PBOC to intervene in the currency, and push it higher at will to avoid giving Yuan bears the upper hand, overnight China engaged in its favorite activity: crushing those same Yuan bears by sending margin costs for offshore Yuan through the roof, forcing yet another historic short squeeze.

As Bloomberg reports, the offshore yuan soared the most in four months as funding costs surged "amid speculation policy makers were supporting the currency" following Moody's surprise rating downgrade last week. The offshore Yuan jumped as much as 0.8% to 6.7677 per dollar, the highest level since Nov. 4, before easing to 6.7731. The currency has rallied 1.6 percent, the most in Asia, since Moody’s Investors Service cut its rating on China’s debt a week ago.

As shown below, and as reported in our morning wrap, a short squeeze launched by China's central bank has slammed yuan bears, after Hibor, the overnight yuan interbank rate in Hong Kong, surged 15.7% points on Wednesday to 21.08% , the highest since Jan. 6...

... while the offshore yuan’s overnight deposit rate jumped to a whopping 65%, the highest so far this year.

Having emerged as a favorite mechanism to "clear out shorts", the PBOC has aggressively hiked offshore yuan funding costs before, with the overnight interbank loan rate in Hong Kong surging to 66.82% in January last year, and hitting again 23.68% last September, then surging again this January to 61.33% amid tightened capital controls on the mainland. Overnight it rose even more.

“The sharp gain in the offshore yuan is partially due to the unwinding of short yuan positions because the high offshore yuan funding cost has made the currency too expensive to short,” said Stephen Innes, senior Asia-Pacific currency trader at Oanda cited by Bloomberg. “Bears with short yuan positions would need to cut their exposure."

Chinese government intervention has been speculated to be behind a scorching rally in China’s financial markets since Moody’s said May 24 the nation’s efforts to cut leverage would be insufficient to curb debt, which culminated with Friday's announcement that Beijing would change the way it calculates the yuan’s daily reference rate against the dollar, a move that’s likely to reduce exchange-rate volatility while undermining efforts to increase the role of market forces in Asia’s largest economy. As a result both on and offshore Yuan rates have hit the highest levels since November.

To be sure, The increase in yuan funding costs is an increasing signal that authorities are intervening, said Nathan Chow, a Hong Kong-based economist at DBS Group Holdings Ltd. He speculated, as have others, that "officials may be reacting to prevent a negative reaction from Moody’s downgrade."

Of course, China can intervene for only so long at which point the bears will return, but the real question is: just how worried is the Chinese central bank if it is engaging in such dramatic actions to prevent Yuan selling following what is mostly a symbolic downgrade, which merely told the world what everyone already knew, namely that China has too much debt - hardly news to anyone who trades the Chinese currency...