Analysts said offshore buying by state-owned banks, under the direction of the People's Bank of China (PBOC), dried up yuan liquidity to such an extent that overnight yuan borrowing rates in Hong Kong (HIBOR) hit a record high, and the spread between onshore and offshore yuan exchange rates briefly evaporated. Last week, the spread had exceeded 2 percent, making it harder for China to stem capital outflows.
"It remains to be seen if the PBOC can achieve convergence without stymieing the offshore market," said Andy Ji, Asian currency strategist for Commonwealth Bank of Australia in Singapore. "If the PBOC doesn't manage to achieve convergence, it will suffer further. I see risks of a stronger yuan against the rest of Asia because the PBOC needs to keep the renminbi stable, whereas the rest of Asia suffers from broad risk-off over uncertainties regarding the PBOC's actions," said Ji.
Onshore yuan weakened, putting more pressure on the Singapore dollar. The city-state's currency closely tracks the renminbi as traders and analysts believe it is included in the undisclosed currency basket used by the Monetary Authority of Singapore to manage monetary policy. The Malaysian ringgit led regional losses on sliding oil prices and after Moody's Investors Service on Monday cut the country's sovereign rating outlook to stable from positive.
The ringgit slid as continuous falls in crude prices added to concerns over Malaysia's sliding oil and gas revenues. Malaysia is a major supplier of palm oil and liquefied gas. Crude prices have slumped as much as 20 percent since the beginning of the year.
The Malaysian currency also came under pressure after Moody's slashed the country's rating outlook. "The domestic bond market may turn slightly defensive in reaction to the news, but we don't expect large foreign outflows as a result of the rating outlook cut by Moody's," said Winson Phoon, a fixed income analyst for Maybank Investment Bank in Kuala Lumpur.
South Korea's won started the day firmer, but it turned weaker to hit a fresh 5-1/2-year low as a weaker yuan prompted offshore funds to rush to sell the won. The currency slid to as weak as 1,213.0 per dollar, its lowest since July 2010. Caution increased over possible intervention by South Korea's foreign exchange authorities to stem further weakness in the worst-performing Asian currency so far this year. Still, the won is likely to fall further if it weakens past a strong chart support level at 1,213.6, the 76.4 percent Fibonacci retracement of its appreciation from 2010 to 2014, analysts said. The South Korean unit is seen heading to 1,277.0, its low of 2010, once the support line is broken, they added.