Goldman: An Attractive Funding Currency For Carry Trades

Goldman Sachs note that “CNY faced significant depreciation pressures in August, due to weakened economic data and shaky confidence in GDP growth.”

• “The surprising policy rate cut also reminded investors of large interest rate spreads, suggesting that the authorities might prioritize growth over exchange rate stability.”
• “Instead, the PBOC stepped up efforts to slow CNY depreciation via other instruments. Over the past two weeks, the authorities signalled discomfort via strong CNY fixing (i.e., a negative CCF), followed up by active CNH liquidity management, and FX deposit RRR cut.”
• “Although CNH liquidity management could be sustainable and effective to push back against one-way depreciation expectations, current conditions still suggest weakening pressures on CNY, especially as the USD strengthens.”
• “With expectations of more monetary policy easing, CNY is likely to remain an attractive funding currency for carry trades.”
• “In our client conversations, hedge fund investors have shown rising interest in riding the waves of FX interventions via CNH-CNY basis trades and NDIRS/CCS spread trades.”