(Bloomberg) -- The widening gap between spot onshore yuan and its daily reference rate has spurred speculation authorities may intervene again to narrow the difference.
The currency closed 0.18 percent weaker than its fixing Monday, the widest discount since June 26. Back then, at least two big Chinese banks were subsequently seen dumping dollars against the yuan, stoking speculation the People's Bank of China ordered intervention to drive the exchange rate higher. Tuesday, the exchange rate ended 0.16 percent lower than its reference rate.
China doesn't like to see a wide divergence as that suggests the market is taking a contrary view to it on the currency, which can affect sentiment, according to Australia & New Zealand Banking Group. The yuan can't trade any more than 2 percent either side of its reference rate.
“No matter how hard the authorities try, it is proving difficult to eliminate the discount,” Jason Daw, head of emerging-market foreign-exchange strategy at Societe Generale SA in Singapore, wrote in a note Tuesday. “If the authorities view this as reflecting latent capital outflow pressure or speculative activity, intervention could become a more regular occurrence.”
One major state-owned bank sold a significant amount of dollars with one-year tenor against onshore yuan in mainland's swap market Tuesday, according to four traders who asked not to be identified. The PBOC used to sell dollars in swaps and forwards market in long-end, obtain the greenback in the short-end, and dump it in spot market in an effort to support yuan.
The onshore yuan was down 0.04 percent at 6.8015 per dollar at 5:42 p.m. in Shanghai, while the offshore exchange rate weakened 0.14 percent to 6.8067. The PBOC cut the fixing by the most in two weeks to 6.7889 Tuesday, following an advance in the greenback overnight.
Read how the PBOC was suspected of intervening three times in late June.
To damp depreciation pressure, the government has also taken steps such as tightening capital controls and offshore yuan liquidity, and tweaking its fixing mechanism.
To contact Bloomberg News staff for this story: Tian Chen in Beijing at tchen259@bloomberg.net, Helen Sun in Shanghai at hsun30@bloomberg.net.
To contact the editors responsible for this story: Richard Frost at rfrost4@bloomberg.net, Will Davies
With assistance from Tian Chen, Helen Sun
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