China's 2-year swaps fell to a new......>

CHINA RATES: China's 2-year swaps fell to a new cyclical low today of 3.17%,

while the 5 and 10-year instruments also remain at multi-month lows of 3.42% and

3.57% respectively. 

- The rate curve is also flattening as a combination of the government's

deleveraging campaign and fears of a trade war with the US begin to bite. The

2s-10s swap curve has flattened almost 50bps over the past 18 months to its

current level of 40bps. 

- The spread of 2-year swaps between China and the US has fallen to just 37bps,

down from around 180bps at the start of the year, taking the spread back to 2009

levels. 

-The narrowing spread is either pointing to a sharp divergence in inflation

outlooks between the two countries or a sharp divergence in economic activity.

If it is the latter, as the ongoing tumble in both Shanghai-listed and Hong

Kong-listed equity indices are suggesting, this suggests that CNY weakness may

be just beginning. Having broken above its 200DMA, the technical picture also

points to further upside in USDCNH.