THE yuan pared some of its sharp gains of the past two days and traded weaker against the U.S. dollar Friday, recording huge weekly rise after China was suspected of pushing up overnight borrowing costs to discourage bearish bets on the currency.

    Both onshore and offshore yuan rallied Wednesday and Thursday, driven predominantly by a blow-up in yuan borrowing costs offshore and tighter liquidity. The spread between the two spot rates widened to its highest since 2010.

    Chinese authorities are keen to deter speculation in the currency and traders suspect policymakers have sought to prevent it from weakening to the 7-per-dollar level, ahead of U.S. President-elect Donald Trump’s inauguration Jan. 20.

    Traders said the market had long held a strong “one-way” expectation of depreciation in the yuan and the rally in the currency was the authorities’ attempt to alter such views.

    It is not clear if authorities have engineered the spike in yuan borrowing rates in Hong Kong last week. But they had used such a tactic before to support offshore yuan exchange levels and by extension relieve some of the pressure on the yuan onshore, which is trading at more than eight-year lows.

    But while policymakers may have some success in the short-run in arresting the yuan’s descent, pressure will remain on the yuan to depreciate over time, they said.

    “I don’t think the volatility in the yuan so far this week will reverse the trend of depreciation. But the yuan is at least unlikely to have another rapid fall ahead of the Lunar New Year,” said a Shanghai-based trader at a foreign bank Friday.

    The People’s Bank of China set the official midpoint for the yuan, which is allowed to move in a tight band around that guidance rate, at 6.8668 per dollar prior to the market opening Friday, 639 pips or 0.9 percent, firmer than the previous fixing.

    That made it the largest upward move since the yuan was revalued and taken off a fixed dollar peg in July 2005.

    The spot market opened at 6.8789 per dollar and settled at 6.9230 as of 4:30 p.m. Friday afternoon, 400 pips weaker than the previous late session close and 0.82 percent softer than the midpoint.

    The Chinese currency traded 0.6 percent weaker against the dollar late Friday, but was still around 0.3 percent firmer than a week ago’s close and logged its best week in more than a month.

    Onshore yuan’s retreat Friday was a result of increasing dollar demand by companies after the U.S. currency eased off 14-year highs, said a trader at a domestic bank.

    Interbank rates for the offshore yuan surged last week, suggesting China is keen to squeeze speculators by making it prohibitively expensive to short-sell the yuan. Yuan liquidity conditions in Hong Kong, the main offshore yuan hub, have been tightening.

    Overnight yuan interbank rates in Hong Kong were fixed at 61.333 percent Friday, up sharply from 38.335 percent Thursday, while yuan deposit rates implied by the offshore forward market ballooned to 112 percent before easing.

    Some of the pressure on yuan funding has also been on account of a drying-up of yuan deposits in Hong Kong.

    The offshore yuan, or CNH, rose about 2.5 percent since Tuesday, with its gains over Wednesday and Thursday being the biggest two-day gains since its introduction in 2010.

    Its rally rippled across major currency markets, causing the U.S. dollar to give up some of its recent gains against the euro and yen.

    Still, few seem to be altering their expectations for a weaker yuan in the coming months.

    “We believe the surge in the CNH is not sustainable,” wrote Gao Qi, forex strategist at Scotiabank in Singapore. (SD-Agencies)