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CHINA: Surge in CNH Points Shows Strains on Currency Despite Contained Spot

CHINA
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  • Much market focus being paid to the sharp rise in CNH forward points (the 3m forward discount has risen to -290 points from -440 points at the beginning of November, and the 12m discount to -1370 points, a new 18-month high, from -1600). Tighter offshore liquidity and demand for USDCNH upside are the likely drivers here, although Bloomberg do note that a typhoon headed to Hong Kong could also be having an adverse impact.
  • We see the PBOC as having restarted the counter-cyclical factor in their daily CNY fix this week, in a likely direct move against recent weakness in the currency - and it remains possible that year-end settlement flows could prop up the CNY into year-end. The Tuesday fix saw a notable widening in the fixing error - the largest since August and a key indicator for a more activist PBOC.
  • A more active counter-cyclical force via the PBOC may mean that potential USD/CNY spot gains are capped ahead of 7.30 - however downside pressures will likely continue to show up on the forwards curve, particularly as markets head into the new Trump administration from January next year, and the greater risk of protracted trade war.
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  • Much market focus being paid to the sharp rise in CNH forward points (the 3m forward discount has risen to -290 points from -440 points at the beginning of November, and the 12m discount to -1370 points, a new 18-month high, from -1600). Tighter offshore liquidity and demand for USDCNH upside are the likely drivers here, although Bloomberg do note that a typhoon headed to Hong Kong could also be having an adverse impact.
  • We see the PBOC as having restarted the counter-cyclical factor in their daily CNY fix this week, in a likely direct move against recent weakness in the currency - and it remains possible that year-end settlement flows could prop up the CNY into year-end. The Tuesday fix saw a notable widening in the fixing error - the largest since August and a key indicator for a more activist PBOC.
  • A more active counter-cyclical force via the PBOC may mean that potential USD/CNY spot gains are capped ahead of 7.30 - however downside pressures will likely continue to show up on the forwards curve, particularly as markets head into the new Trump administration from January next year, and the greater risk of protracted trade war.