Goldman Sachs On CNY & China Rates

The US bank sees USD/CNH range bound in the near term, but CNH can underperform USD and EUR longer term, given carry considerations. Goldman's sees upside in market interest in China capped as well, see below for more details.

"CNY appreciated amid stronger-than-expected fixings and dovish July Politburo meeting. CNY appreciated against USD and EUR more significantly than against the trade-weighted basket over the past month. The CNY fixing remained much stronger than what overnight moves implied, suggesting authorities’ preference to slow/stop currency depreciation for now. Unwinding positions of short CNH amplified the volatility of exchange rates. Although the July Politburo meeting is encouraging for H2 growth outlook, investors are still awaiting detailed policy measures and implementations. USDCNH will likely be range-bound in the coming months. Incoming easing measures, especially for property sector, would boost growth sentiment. However, likely monetary policy easing, combined with attractive carry returns of short CNH against USD and EUR, should continue to weigh on the Renminbi."

"A rates round-trip with curve steepening on reversal of policy expectations. Both cash bond yields (such as CGB yields) and NDIRS rates declined further until late July, on the deterioration in property sector and the lack of confidence. The crowded positions on receiving rates (and buy cash bonds) unwound somewhat on the more dovish than expected July Politburo meeting, with long-term rates recovering back to early July levels. CGB/CDB bond curve remained stable, while NDIRS curve steepened. Short-term CGB yields and swap rates are likely to stay low, given our expectations of monetary policy easing by the PBOC and the indebtness of property sector and LGFVs. Long-term rates, such as 10y CGB yields and 5y NDIRS rates, could drift up further with steeper curve in the event of concrete measures, such as more fiscal stimulus funded by accelerated LGSB issuance, and additional relaxation in home purchase/resales restrictions, especially in large cities with population inflows. However, the upside room to market interest rates is likely to be limited, given the falling consensus expectations of growth and inflation next year. For USD-funded investors, FX hedged bonds remain an attractive option given sizeable spreads over US treasury yields."