CHART: It just became staggeringly expensive to borrow Chinese currency for offshore trading

It just became a lot more expensive to borrow offshore traded Chinese yuan.

It’s a big blow to anyone borrowing the currency looking to fund bets of the offshore traded yuan, or CNH, against it weakening further.

The CNH Hong Kong interbank offered rate, known as HIBOR, was set at a whopping 38.335% on Thursday, more than double the 16.95% level rate of a day earlier.

It is essentially the rate charged between lenders in Hong Kong to borrow offshore trade yuan overnight.

Today’s rate was the highest level seen since January 12 last year, a period that coincided with significant pressure on the yuan, much like is being seen at present.

The chart below tells the story.

Source: Thomson Reuters

The spike in borrowing costs likely due to intervention from the People’s Bank of China (PBOC) to support the yuan amidst growing speculation that the currency will continue to weaken against the US dollar.

According to Reuters, analysts said a surge in borrowing costs on Wednesday was as a result of a shrinking yuan pool in Hong Kong, a result of fewer people seeking yuan-denominated assets owing to expectations the currency will weaken further.

Demand is high and supply is short as liquidity is drained from the system, leading to a spike in borrowing costs.

“The depreciation expectation of the yuan remains and it takes time for investors to rebuild their confidence in the Chinese currency,” Liao Qun, China chief economist at Citic Bank International, told Reuters.

It’s likely that spike in HIBOR seen today is merely a continuation of efforts from the PBOC to reduce speculation of further yuan weakness.

For the moment the battle appears to be working. The USD/CNH is currently trading at 6.878, well below the levels seen earlier this week when it hit a record-high of 6.9872.

However, as this longer-term chart shows, the trend is clearly higher at present.

USD/CNH Daily Chart

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