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(U2) Downtrend Extends


Spreads Maintain Strong LNG to Europe

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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. 18          Sept. 15                          18                  Sept. 15
6.5752              6.5526                      6.5618                    6.5442
     USDCNY closed at CNY6.5752, after trading in a CNY6.5465 to CNY6.5761 range
(Bloomberg levels). 
     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 near CNY6.4390, the lowest since
Dec. 11, 2015, when the pair bottomed also at CNY6.4390. USDCNY has since moved
higher in line with an improved dollar tone. 
     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. 
     Monday's CNH-CNY closing spread (at 11:30 p.m. local time) was +1 pip
versus -40 pips Friday 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 CNH6.5739 Monday, after holding in
a CNH6.5439 to CNH6.5784 range. 
     The USDCNH low of CNH6.4436, seen Sept. 8, was the lowest level since Dec.
7, 2015, when the pair bottomed at CNH6.4425. 
     Nearly 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 CNY6.5419 versus CNY6.5423 Friday. 
     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. 
     It is difficult to say whether the appreciation of the yuan exchange rate
this year can continue, but it has provided the People's Bank of China with the
opportunity to relax its strict controls on capital outflows and push forward
its goal of a market-determined "clean float" of the currency, Guan Tao, former
head of the balance of payments division at the State Administration of Foreign
Exchange (SAFE), the government foreign-exchange regulator, told Market News
International in an exclusive interview. See MNI Main Wire at 7:16 a.m. ET for
--MNI New York Bureau; tel: +1 212-669-6438; email:

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