As Yuan Offshore Renminbi dropped to parity with its onshore counterpart yesterday, Yuan based Hibor (Hong Kong interbank offered rate), which jumped to as high as 66.8% dropped sharply closer to normal today (8.31%). PBoC had been draining Yuan liquidity from offshore market since last week to reign on offshore Yuan rate that dropped more than 2% last week against its onshore counterpart.

Friday Yuan Hibor was 4%, whereas on Monday it touched 13.4% and Tuesday to new record as traders rushed to close off the trade.

Unlike Libor, Yuan Hibor is of less prominence interest rate derivatives and loan market but PBoC sent a clear message to traders this week that it is not out of tools in controlling offshore Yuan and it won't be an easy central bank to break. Majority of the losers were those left with short positions in Offshore Yuan this week.

This week's move in Yuan and rates gave stronger evidence to our theory that Yuan weakness may not be deliberate devaluation. However we expect Yuan to keep declining against Dollar, due to outflow pressure unless Chinese economy improves materially.

Yuan is currently trading at 6.572 per Dollar. Chart courtesy Financial Times.