After soaring to a record on Tuesday, the cost to borrow offshore yuan overnight plummeted on Wednesday.
The overnight offshore yuan interbank offered rate, or HIBOR, fixed at 8.21% in Hong Kong, just a fraction of the 66.82% level of Tuesday.
Yuan HIBOR is the benchmark interest rate used to price all loans in offshore traded yuan, or CNH.
On the back of likely large-scale intervention from the PBOC in the offshore market on Tuesday, overnight borrowing costs soared as money market liquidity all but vanished.
The PBOCâ€™s purchases tightened the supply of offshore yuan from the banking system, making it more expensive to borrow.
It also made it extremely expensive to fund long USD/CNH trading positions, which grew substantially last week on the back of expectations that the yuan would continue to weaken.
Despite the return to normalised liquidity levels, the PBOC’s action have certainly worked to quash speculation of further weakness.
USD/CNH is currently trading at 6.5709, lower than its onshore counterpart, USD/CNY, at 6.5768.