Yuan Volatility Wanes Offshore as Hibor Eases, Fed Holds Rates

(Bloomberg) -- A gauge of expected price swings in the offshore yuan dropped to the lowest level in a month as a cash squeeze eased and the Federal Reserve scaled back its outlook for higher borrowing costs.

The offshore yuan’s one-month implied volatility, which is used to price options, slid 44 basis points to 3.87 percent as of 5:11 p.m. in Hong Kong, according to data compiled by Bloomberg. That’s the lowest level since Aug. 18. A measure of the greenback’s strength fell the most in two weeks on Wednesday after a divided Fed left its key rate unchanged, with officials now anticipating two increases in 2017, one less than they projected in June.

The overnight cost of borrowing the yuan in Hong Kong slumped to 1.46 percent on Thursday, after jumping as high as 23.7 percent on Monday amid speculation that the Chinese central bank was fending off bearish bets. The U.S. central bank’s interest-rate outlook, which came after the Bank of Japan announced a more flexible approach to expanding stimulus, undermines bets that the dollar would gain.

“The Fed’s decision to hold could make it easier for China to keep the yuan stable” ahead of its inclusion in the International Monetary Fund’s reserves from Oct. 1, said Irene Cheung, a foreign-exchange strategist at Australia & New Zealand Banking Group Ltd. in Singapore. “This round of offshore yuan liquidity squeeze has eased, but there’s a chance that cash supply will be tightened again when some strong expectations for dollar gains appear.”

The offshore yuan weakened 0.14 percent to 6.6795 to a greenback on Thursday, while the rate in Shanghai slipped 0.06 percent to 6.6697. The People’s Bank of China strengthened its daily reference rate for the onshore currency by 0.34 percent, the most in a month. A Bloomberg replica of the trade-weighted CFETS RMB Index, which tracks the yuan against 13 currencies, slipped 0.2 percent.

The overnight Hibor had surged on Monday to the second highest level on record amid speculation that China’s central bank intervened to increase the cost of betting against the currency for bears by mopping up supply. The PBOC has said the speculation wasn’t accurate.

To contact Bloomberg News staff for this story: Tian Chen in Beijing at tchen259@bloomberg.net. To contact the editors responsible for this story: Richard Frost at rfrost4@bloomberg.net, Phani Varahabhotla, Sarah McDonald

With assistance from Tian Chen