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Offshore yuan is higher in early trade, building on gains from Tuesday after recording the first rise in four days as risk sentiment turned more positive. The yuan seems to be weathering the delta variant storm better than many of its regional peers thanks in large part to low case numbers which have mostly stayed below 100 per day in 2021 so far. CNH is down 0.31% in the past month compared to a 3.66% drop for THB and 3.28% for PHP. Volatility has also remained subdued, 6-month CNH implied volatility touched 4.39% on Friday, the lowest since January 2020, IV has picked up slightly to 4.5775% but remains below its 50-, 100- & 200-DMA. USD/CNH has been in a range from 6.40-6.60 since November 2020.
- On the geopolitical front China has refuted allegations by the US and UK that China was behind the Microsoft exchange hack. A spokesman from the Chinese foreign ministry said the US and its allies had ganged up on China.
- LPR rates were kept in hold yesterday, which has confirmed to some that the PBOC is not embarking on an easing cycle. JP Morgan says "There is no urgency to consider lowering the policy rates for the moment. On the one hand, inflation (headline CPI inflation and core CPI inflation) likely will move up modestly in 2H21, leading to a decline in the real interest rate. More importantly, the government's objective of lowering the comprehensive funding cost for the real economy can be achieved via other channels: (i) reduction in non-interest rate fees and other charges. On July 15, two banks announced to reduce upfront fees on mutual funds distributed, and JPM banking analysts estimated the impact on bank earnings could be on average 80bps; (ii) a downward shift in the loan rate distribution matrix to lower the average lending rate in the banking sector; (iii) the improved liquidity condition could guide lower key financial interest rates. For instance, the 10-year CGB yield fell below the 3% threshold immediately after the RRR cut announcement. Lower bond-financing cost will help lower the funding cost for corporates; (iv) the PBOC can provide special lending facilities at favorable terms through banks (e.g., re-lending, re-discount, or targeted lending facilities) to provide low-cost funding to targeted sectors (e.g., SME, green sectors)."