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CNH: Relative Monetary Policy Cycles Pointing To Further CNH/JPY Downside

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USD/CNH is benefiting from broader USD softness so far today, as speculation continues around whether the Fed will kick start the easing cycle next week with a 50bps cut. The pair was last 7.1075, around 0.15% stronger in CNH terms. Earlier lows were at 7.1038. We are still some distance from earlier September lows at 7.0735. 

  • Outside of typically low beta with broader USD shifts, the weaker yield backdrop for local bond yields may be inhibiting CNH upside. The 10yr CGB yield fell to fresh lows back to 2002 earlier, comfortably sub 2.10%. The authorities are attempting to engineer a steeper yield curve. Weak economic fundamentals is still likely pushing flows into bonds though.
  • The chart below plots the long run trends of the CNY/JPY cross versus the China-Japan 2yr government bond yield differential. This spread is now back sub +100bps for the first since 2009.
  • There are lots of moving parts to the CNY/JPY cross, but respective monetary policy stances have trended strongly favor of the yen in recent months. The BoJ is clearly open to hiking rates further, while policy rates in China remain biased lower.   
  • For CNH/JPY, we are close to recent lows sub 19.80. A break lower could see the 19.72 region target, lows from late 2023.
  • A potential support for CNH and the onshore spot rate is conversion of exporter proceeds back into local currency. This may pick up at the commencement of the Fed easing cycle. Note as well tomorrow's activity updates for August in China. 

Fig 1: CNY/JPY & China-Japan 2yr Government Bond Yield Differentials 

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USD/CNH is benefiting from broader USD softness so far today, as speculation continues around whether the Fed will kick start the easing cycle next week with a 50bps cut. The pair was last 7.1075, around 0.15% stronger in CNH terms. Earlier lows were at 7.1038. We are still some distance from earlier September lows at 7.0735. 

  • Outside of typically low beta with broader USD shifts, the weaker yield backdrop for local bond yields may be inhibiting CNH upside. The 10yr CGB yield fell to fresh lows back to 2002 earlier, comfortably sub 2.10%. The authorities are attempting to engineer a steeper yield curve. Weak economic fundamentals is still likely pushing flows into bonds though.
  • The chart below plots the long run trends of the CNY/JPY cross versus the China-Japan 2yr government bond yield differential. This spread is now back sub +100bps for the first since 2009.
  • There are lots of moving parts to the CNY/JPY cross, but respective monetary policy stances have trended strongly favor of the yen in recent months. The BoJ is clearly open to hiking rates further, while policy rates in China remain biased lower.   
  • For CNH/JPY, we are close to recent lows sub 19.80. A break lower could see the 19.72 region target, lows from late 2023.
  • A potential support for CNH and the onshore spot rate is conversion of exporter proceeds back into local currency. This may pick up at the commencement of the Fed easing cycle. Note as well tomorrow's activity updates for August in China. 

Fig 1: CNY/JPY & China-Japan 2yr Government Bond Yield Differentials 

Keep reading...Show less