China's yuan shot higher in offshore markets on Thursday on suspected rare intervention by Chinese state banks that was seen as a bold gesture by authorities to shake out speculators betting against the currency.
The intervention caught the market wrong-footed and catapulted the yuan more than 1 percent higher, putting the offshore rate on track for its biggest daily gain on record.
Investors have been positioning for yuan depreciation since a shock devaluation of the currency in August, which sparked fears the economy was slowing down more than expected. Those bets are easier to place in offshore markets, where Chinese authorities have less influence.
"The big picture is that policy makers are doing everything they can do to dampen expectations that the yuan will depreciate much," said Mark Williams, an economist at Capital Economics in London.
"There's been rumors before of state entities acting on behalf of the central bank offshore. It shows that policymakers are unwilling to relax control of key variables that now include the offshore currency."
The PBOC did not respond to calls requesting comment.
Since the devaluation, China has scrambled to keep the yuan steady, running down its foreign exchange reserves by a record amount in August to stabilize the onshore rate.
Wednesday's rise in the offshore yuan was the clearest indication to date that China will also try to stop speculation against its currency outside of the mainland.
The offshore yuan spot rate strengthened more than 1 percent to 6.39 per dollar from 6.4698 earlier in the day. It marked the offshore rate's highest level since the devaluation.
Offshore traded volumes spiked as much as 10 times their monthly average, Thomson Reuters data showed.
As a result of the intervention, the long-standing spread between the onshore and offshore rates narrowed sharply, while dollar currency forwards dropped.
The offshore yuan discount to the onshore yuan spot market narrowed to 0.47 percent from 1.56 percent on Wednesday.
The wide gap had implied that offshore markets were pricing in further depreciation in the currency, an expectation China has been trying to suppress.
"In the very extreme moment of the buying, we saw a rare reverse market quote in the Chinese currency, which is an indicator that the buyers wanted to push up the value of the yuan at any cost," said the head of local currency trading at a U.S. bank in Hong Kong.
A "reverse market quote" refers to when the bid price is higher than the offer price, which traders said pointed to intervention.
"There are some Chinese banks steadily buying large amounts of yuan," said a trader at an Asia commercial bank in Hong Kong.
"But even if it is intervention by the central bank, I don't think it will change the expectation on the depreciation of yuan."
Chinese authorities have gone to extraordinary lengths in recent months to prevent a precipitous fall in their financial markets with a series of policy changes and intervention. China's major stock indexes have fallen nearly 40 percent since June.
Tough medicine for the ailing stock markets has brought stability to prices but at a cost; equities and futures are trading so thinly that they are in danger of flat lining.
To be sure, the offshore yuan market is critical for the internationalization of the yuan as China moves towards opening up its capital account. Since the market began in 2009, China trade settled in yuan has taken off and Chinese and foreign borrowers have raised yuan debt offshore.
Traders say the central bank often instructs major state-owned banks to intervene onshore to control the market exchange rate. They said a sharp depreciation in the yuan in early 2014 was engineered by the central bank.
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