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USD/CNH Hits Record Highs, Policy Divergences Remain In the Drivers Seat


USD/CNH traded to fresh record highs overnight. The pair got close to 7.2750. We currently sit at slightly lower levels, just under 7.2700. The chart below plots USD/CNH against the US-CH 2yr government bond yield spread. The two series continue to move in lock step with each other.

  • China 2yr bond yields remain above early September lows but have trended back close to 2% in recent weeks. The 10yr has performed slightly better from a yield stand point (around +10bps off Aug/Sep lows, last at 2.70%).
  • Renewed upside in US yields overnight continues to highlight the divergence in monetary policy cycles though.
  • Note the 1yr and 5yr LPR rates decisions are scheduled for today, although they may not be released given the on-going Party Congress and delays to other data releases this week. In any case, the market doesn’t expect any change in either rate (1yr LPR currently at 3.65%, the 5yr at 4.30%).
  • From a technical standpoint in USD/CNH, 7.2851 is an upside Fibonacci projection, while beyond that is 7.3000, likely round figure resistance.

Fig 1: USD/CNH & US-CH 2yr Government Bond Yield Spread

Source: MNI - Market News/Bloomberg

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