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(M1) Directional Triggers Intact


Approaching Major Support


Inflation Concerns Underpin Bear Steepening


Bullish Theme

By Vicki Schmelzer
     NEW YORK (MNI) - On-shore Chinese yuan CFETS close 
23:30 local    23:30 local
time close      time close      16:30 local time CFETS    16:30 local time CFETS
                            reference rate close Sept.     reference rate close
Sept. 29          Sept. 28                          29                  Sept. 28
6.6528              6.6608                      6.6470                    6.6699
     USDCNY closed at CNY6.6528, after trading in a CNY6.6394 to CNY6.6832 range
(Bloomberg levels). Friday's high was the highest level for the pair since
August 16, when USDCNY saw a high near CNY6.6971.
     On June 27, dollar-yuan topped out at CNY 6.8442, before falling off
sharply as big Chinese banks sold dollars to prop up the yuan, purportedly at
the prompting of the People's Bank of China (PBOC). 
     Subsequently, USDCNY moved steadily lower, in line with an overall softer
U.S. dollar tone. The pair bottomed Sept. 8, 2017 near CNY6.4390, the lowest
since Dec. 11, 2015, when the pair troughed also at CNY6.4390. 
     Last year, USDCNY posted a high of CNY6.9648 Dec. 28, 2016, very close to
the CNY6.9649 high seen Dec. 16, 2016, which was the weakest yuan level since
May 21, 2008, when USDCNY topped out at CNY6.9743. 
     As a reminder, back on Jan. 12, 2016, the PBOC intervened heavily in order
to narrow the spread between the on-shore and off-shore yuan, which had widened
to over +1,400 pips in the first week in January as speculators entered into CNH
shorts on expectations of a higher USDCNY. 
     The PBOC was forced to intervene as one of the conditions of the yuan's
entry into the IMF's SDR basket was to close the gap. 
     In subsequent months in 2016, the CNH-CNY spread narrowed markedly,
reflecting overall improved risk appetite. The spread widened in response to the
June 23rd Brexit vote, but later narrowed again. 
     Beginning in December 2016, the CNH-CNY spread turned negative on several
occasions and the spread subsequently traded at extremely wide negative levels. 
     Analysts attributed the negative spreads, seen at times in 2017 to tighter
CNH funding conditions and positioning, not improved risk sentiment. 
     Friday's CNH-CNY closing spread (at 11:30 p.m. local time) was -64 pips
versus -40 pips Thursday and compared to the -607 pips seen May 31. The August 9
spread of +223 pips was the most positive spread since Dec. 12, 2016, when the
spread stood at +267 pips. 
     The Feb. 3, 2017 spread was -719 pips, which was the widest negative spread
since the -891 pip spread seen Jan. 5. On Dec. 19, 2016, the spread was -276
pips, which was the most negative spread of 2016. 
     On Nov. 23 and Nov. 25, 2016, the CNH-CNY spread widened to +287 pips. This
was the widest positive spread since Brexit in late June 2016, when on June 27,
the closing CNH-CNY spread of +396 pips was the widest, i.e. most risk averse,
since Feb. 3, 2016 when the spread was also +396 pips. 
     On Jan. 2, 2017, the off-shore yuan fell to a new life-time low versus the
dollar around CNH6.9895. Since then, overall the CNH has strengthened in line
with the CNY.
     Dollar-yuan (offshore) was trading near CNH6.6475 Friday, after holding in
a CNH6.6385 to CNH6.6758 range. Thursday's high near CNH6.6788 was the highest
since August 21, when the pair topped out at CNH6.6884.
     The USDCNH low of CNH6.4436, seen Sept. 8, was the lowest level since Dec.
7, 2015, when the pair bottomed at CNH6.4425. 
     Over four months ago, when U.S. Treasury yields and the dollar were flying
higher, USDCNH posted a high near CNH6.9177 May 9, the highest level since March
9, when the pair saw a high near CNH6.9319. 
     Earlier, the People's Bank of China set the yuan central parity fixing
versus the U.S. dollar at CNY6.6369 versus CNY6.6285 Thursday. 
     The Sept. 11 fixing of CNY6.4997 was the highest yuan fixing level since
May 12, 2016, when the parity rate was set at CNY6.4959. At the time, the PBOC
had set the fixing stronger for 11 straight trading days.
     These levels compared to the CNY6.9526 fixing, seen Jan. 4, 2017, which was
the weakest yuan fixing level since May 21, 2008. 
     Friday's update will be the last "On-shore USDCNY Close" report. If you
have any questions or concerns, contact
--MNI New York Bureau; tel: +1 212-669-6438; email: